The Citadel Group Limited

Change in Revenue Mix led the Revision in FY19 Key Numbers: The Citadel Group Limited (ASX: CGL) is a leading ASX-listed software and technology company that specialises in secure enterprise information management in complex environments. Recently, the Group released a trading update for FY19 stating that sales revenue for FY19 will be in the range of $97 million - $104 millionGross profit margins are also expected to be reduced to ~ 46%. Expectations for EBITDA stands in the range of $22 million - $24 million for FY19.

The changes in the expectation for FY19 revenue and earnings are based on two factors- (1) customer-controlled project extensions which earlier, were expected to start in the second half of FY19 but are now expected to commence beyond the first half of FY20, (2) The company is not undergoing the same rise in the fourth quarter of FY19 in customer expenditure as experienced in the previous years.

Financial Performance in 1H FY19: The company announced results for the six months ended 31 December 2018 (H1 FY19). The company delivered another strong half year result underpinned by accelerating growth in Software-as-a-Service (SaaS) solutions. The Software/SaaS revenue was up by 39.1% to $16.8 million, driving long-term sustainable growth and total revenue growth of 5.5% to $49.1 million in 1HFY19. The net profit after tax for the period was reported at $6.7 million, an increase of 5.4%. 

The gross profit margin of the company was moderated to 47.3%,reflecting a shift in revenue mix to SaaS and increased revenue contribution from products. The EBITDA was up by 3.2% to $13.2 million during 1H FY19. Higher EBITDA growth was largely driven by investment in new SaaS technologies including SaaS platform development. Additionally, higher recurring revenue that reduced upfront revenues and extended those revenues over a prolonged period also contributed to the EBITDA growth. The cash position reduced to $16.0 million in 1H FY19 as compared to $24.9 million over the prior corresponding period reflecting dividend payments, loan repayments and payments for Gruden acquisition.


1H FY19 Financial Results (Source: Company Report)

Moreover, the company won a new 9-year contract with the Queensland Department of Transport and Main Roads to provide a secure, hosted managed service for the Electronic Development Application Management system. It will further provide electronic document and records management system Managed Service for 1,500 users in the city of Yarra for a 3+3 year as per agreement. CGL also signed a 5-year eDRMS support agreement with a Government client with 1,500 seats, including a pilot migration to Citadel-IX.

What to Expect From CGL: Citadel will focus on continuing the development and delivering leading secure enterprise information management products and services in the sectors like eHealth, National Security/Defence, all levels of Government and Tertiary Education which are its key drivers, since information security and trust is paramount in these sectors. Moreover, record pipeline has positioned the company for a strong H2 FY19 and beyond.

Moreover, the group will increase the investments in cloud-enabled software so that it can deploy its solutions to Australian and international markets in a rapid pace. Winning of new contracts and scalable cloud-enabled software sales will decide the growth of the company, going forward. The total weighted pipeline (Total Contract Value of active sales opportunities) currently exceeds $132 million in 1H FY19 as compared to $109 million in June 30, 2018 with approximately 70% in SaaS opportunities to new and existing clients.

SaaS is rapidly experiencing a growing global market. In 2018, the SaaS market was estimated to be worth US$73.6 billion, which is expected to grow almost 60% to US$117 billion by 2021. Citadel is well positioned to increase its share of this large and growing market based on its focussed line of growing SaaS business.

Stock Recommendation: The stock is trading at its 52-week low level. It went down by ~39.76% during the days trade primarily on the company’s announcement of lower revenue expectation for FY19. However, the management also expects the company to witness strong growth momentum in FY 2020, across all areas of the business. Hence, wemaintain our “Hold” recommendation on the stock at the current market price of $4.120 per share (down 39.766% as on 17 May 2019). 

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