The Citadel Group Limited

CGL Details

Acquisition Proposal by PEP: The Citadel Group Limited (ASX: CGL) is an enterprise software and solutions company that specializes in managing & supporting of I.T. projects. As on 28 September 2020, the market capitalization of the company stood at ~$439.2 million. The company recently informed that UBS Group AG is ceasing to be a substantial holder in the company. On 14 September 2020, the company informed that Pacific Equity Partners is proposing to acquire 100% shares of CGL via Scheme of Arrangement for $5.70 per share in cash, reduced to the extent of any Special Dividend. The cash consideration is representing a premium of 51.4% to the 3-month volume weighted average price (VWAP) of $3.76 per share and it also represents ~14.7x FY20A PF proportionate EV/EBITDA. The Board of CGL has recommended its shareholders to vote in favour of the Scheme in the absence of a superior proposal.

FY20 Highlights: During FY20, the company reported underlying revenue of $128.4 million, up by 29.4% on the previous year, supported by the growth in the Underlying Software segment revenue and Underlying Services segment revenue. The company’s underlying EBITDA grew by 25.3% during the year to $29.2 million in FY20. One of the important highlights of FY20 was the successful integration of Wellbeing into the Group. The company has declared a fully franked final dividend of 6 cents per share, taking the total dividend to 10.8 cents per share. The dividend is payable on 1 October 2020. At the FY20, the company’s cash position stood at $32.5 million and gross bank debt at $86.5 million.

FY20 Underlying Results (Source: Company Reports)

Outlook: Over the next 2-3 years, the company is expecting to achieve total contract revenue of around $250 - $350m in tenders. The company is also looking to accelerate growth opportunities via improved partnership channels with Micro Focus and LeanIX and establishing a strategic relationship with Change Healthcare in the U.K.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

 Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company is focused on retention of core contracts and expansion of partnership channels to deliver benefits into the future. As per ASX, the stock of CGL gave a robust return of 72.76% in the past three months and a return of 21.30% in the past one month. The stock is trading close to its 52-weeks’ high level. On a technical analysis front, the stock of CGL has a support level of ~$3.87 and a resistance level of ~$6.80. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and have arrived at a target upside of high-single digit (in % terms). Considering the company’s decent FY20 performance, modest long-term outlook and healthy balance sheet, we recommend a ‘Hold’ rating on the stock at the current market price of $5.57, down by 0.179% on 28 September 2020.

CGL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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