The Citadel Group Limited

Strong growth trajectory to be Continued:The Citadel Group Limited (ASX: CGL) is a small-cap software and technology company with the market capitalization of circa $391.38 Mn as of October 12, 2018. CGL offers its services to various industries such as defence, national security, health, and education, etc. Over the period, the company has won many contracts form its clients and increased its profit margin on year on year. On the financial front, CGL has recorded topline and bottom line growth at CAGR of 21.3% and 36.7%, respectively over the five years. Resultantly, the EBITDA and NPAT margin came in at 20.6% and 12.5%, respectively on a 5-year average basis (FY14-18) and the group is on track to improve its PAT margin from the current level. However, in FY18, PAT margin grew by 220 bps to 18.1% from 15.9% in the previous year which is above the industry median of 11.5%. Additionally, the company has also generated a positive return of shareholders’ fund with ROE at 20.5%, higher than the industry average of 13.3%. For FY 2019, there are no major contracts at hand and the group is yet to highlight about these. Although, CGL has bagged the contract of more than $800 million which is in pipeline, of which 60% relate to the SaaS opportunities. Further, the group has targeted at least 1 new Citadel-IX customer per month for FY19.


Significant SaaS Contract Growth (Source: Company Reports)

Meanwhile, the share price has risen 18.25 percent in the past three months as at October 11, 2018 and traded at reasonable PE level of 21.630x. In our view, the stock is quite defensive as the group is in a strong fundamental zone backed by its subscription-based model strategy. Hence, we maintain our “Buy” recommendation on the stock at the current market price of $8.4 (up 5.4% on October 12, 2018).
 

Breville Group Limited

Decent Performance in FY18: Breville Group Limited (ASX: BRG) posted decent FY18 results with total revenue coming in 7.7% higher at $ 652.3 Mn compared to the prior year. It was primarily driven by the revenue growth of 12.2% to $526.9 Mn in core Global Product segment. Whilst, the Distribution segment revenue was down by 7.8% and amounting to $125.5 Mn in FY18. EBITDA grew by 11.6% to $100.2 million in FY18 from $89.8 million in the previous year. The Group EBIT for the year grew by 10% and amounting to $86.9 Mn in FY18 over the prior year. Resultantly, EBIT margin slightly up by ~30 bps to 13.3% in FY18 as compared to 13.0% in the prior year. Net Profit After Tax (NPAT stood $58.5 Mn in FY18, exhibiting decent growth of 8.7 percent on a Y-o-Y basis. During the period, NPAT impacted by increased finance costs and one-off tax adjustments including US federal corporate tax rate change.At 30 June 2018, the Group had a net cash reserve of $58.0 Mn compared to a net cash balance of $41.3 Mn at 30 June 2017. Based on the performance, the Board of Directors declared a 60% franked final dividend of 16.5 cents per share (cps) and it was paid on 5 October 2018 to its shareholders. This summarized a total dividend payment of 32.5 cents per share for the full year, representing a 6.6% rise over the previous year. The management believes that the rising dividend proves the Board’s ongoing commitment to provide strong returns to its shareholders.


FY18 Financial Metrics (Source: Company Reports)

Meanwhile, the share price has risen 10.95% in the past three months as at October 11, 2018 and traded at higher PE level of 27.47x among the peer group. We believe that growth catalyst has already been factored in the stock price. We, therefore, maintain our “Expensive” rating on the stock at the current market price of $12.340, as we wait for further growth catalyst.
 

Xero Limited

Improving Financials Supporting Business Objectives: Xero Limited (ASX: XRO) has recently announced the offering of US$300 Mn of 2.375% guaranteed senior unsecured convertible notes due 2023 and trading update for fiscal 2019. As per the release, the Notes will be issued by Xero Investments (the Issuer) and guaranteed by the Company (the Offering). Further, the notes will bear an interest rate of 2.375% yearly, which will be payable semiannually on 4th day of the month of April and October every year, beginning on 4 April 2019. And, it will mature on 4 October 2023, unless earlier redeemed, repurchased or converted. The initial conversion price of the note is fixed at US$46.338 per share, reflecting a premium of about 30% over the reference share price, based on a Fixed Exchange Rate of A$1.00 = US$0.72745.It is expected that, after paying transaction costs, and other obligations like term loan, funding the costs of the call option transactions, etc, then the net proceeds of ~US$242 Mn will be used for potential acquisitions of, and investments into, strategic and complementary businesses and assets which are in line with Xero’s strategy to drive long-term shareholder value. The Settlement of the Offering is expected on 4 October 2018. Along with the convertible notes offer announcement, the company anticipates the reduction in cash outflow  in FY19 as compared to FY18.


Improving Financial Metrics (Source: Company Reports)

Meanwhile, the stock has performed strongly with YTD return of 49.98% but was down by 9.26% in the past one month as at October 11, 2018. The stock was lately seen to trade close to 17.7% discount to 12-month high of $52.57 against the 67.6% premium to 12-month low of $25.825. Judging by the improved financial performance, increased subscribers base, increased financial flexibility and historic performance of the stock, it is expected that shares price of the company will get a boost in the future. Hence, we maintain our “Hold” recommendation on the stock at the current market price of 43.290.
 

Bigtincan Holdings Limited

Mixed Updates:Bigtincan Holdings Limited (ASX: BTH) posted strong revenue growth in FY18 from new customers and expansion of product use by its existing customers which support to uplift in annualized recurring revenue (ARR). At 30 June 2018, ARR was $15.4 Mn, up 41% over FY17. This “land and expand” approach is an important part of the company’s strategy allowing for faster penetration and the growth from within existing customers. Moreover, the company is on track to deliver its objective of at least 35% – 40% revenue growth in FY19 as compared to FY18. Further, for FY19, the customer retention rate is expected to remain stable as it was in the second half of FY18. In June 2018, the customer retention rate was 85%. On the other hand, BTH has signed a binding Letter of Intent with the majority shareholder of FatStax to acquire FatStax, a US-based company which provides sales enablement software to the manufacturing and life sciences sectors. The initial cash consideration is US$1.8 Mn, with a 6-month earnout payment of up to US$1.4 Mn. The acquisition payments will be 100% in cash, funded from internal sources (i.e., the A$4 Mn identified in the recent capital raising). The objective of this deal is to expand BTH’s presence and offering in the manufacturing and life sciences markets.


FY18 Financial Metrics (Source: Company Reports)

Meanwhile, the share price has risen 7.94% in the last three months but was down by 12.82% in the past one week (as at October 11, 2018). Although, BTH operates in a competitive landscape so that faces a number of risks such as stiff competition from the market players, failure to retain its existing customers and attract new customers, and reliance upon a single segment product. Thereby, we maintain our “Speculative Buy” recommendation on the stock at the current price of $ 0.370 (up 8.8% on October 12, 2018), considering foregoing potential in the business.

 

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