COSOL Limited

COS Details

Acquisition of Digital Solution Company: COSOL Limited (ASX: COS) provides proprietary digital solutions to asset-intensive industries. COSOL is the leading Hitachi ABB Ellipse enterprise software managed service provider in the Asia Pacific and North America. Recently, the company has implemented a Share Purchase Agreement for the acquisition of Clarita Solutions Pty Ltd, a digital solutions company with specialist skills in IBM’s Maximo.

• The company has paid an upfront cash consideration of $7 million and 7,951,123 shares, with earn-out consideration of up to $3.75 million paid in cash or COS shares, which is subject to Clarita achieving performance hurdles based on future increases in audited EBIT over a 2-year period.
• The said acquisition happens to be earnings accretive and will contribute positively to the FY22 result of COS.
• The acquisition would help COS to improve its solution portfolio with capabilities in world- leading digital solutions and companies with digital proprietary IP.

FY21 Financial Summary:

• Growth in Revenue and EBIT: For the year ended 30 June 2021, the company witnessed a growth of 51% and 41% in revenue and EBIT to $33.6 million and $5.52 million, respectively. This growth was mainly backed by strong recurring revenues, new major contract wins, as well as the continued prudent cost management and the ability to achieve greater penetration with new and existing clients with the proprietary digital solutions of the company.
• Acquisition of AddOns Inc.: COS finished the acquisition of AddOns Inc. in 1HFY21, which contributed $6.8 million in revenue, $1.1 million in EBIT (nine months only).
• Declaration of Dividend: The company declared a fully franked final dividend of 1.0 cents per share which took the full-year dividend to 1.5 cents per share.

Revenue & EBIT (Source: Analysis by Kalkine Group)

Key Risks:

• Competitive Pressure: The company is exposed to a risk arising from the rising market share of competitors, which could impact the operational performance of the business.
• Technology Risk: COS’s operational performance could be impacted by the shift in technology in the industry in which it operates.

Outlook:

• For FY22, the company is optimistic about the growth potential of its business. With respect to North America, the company would leverage and expand its presence in North America following the acquisition of AddOns Inc.
• The company would also work on increasing RPConnect® licence sales and other proprietary digital solutions. COS is also focused on expanding its Digital products and service offerings via strategic acquisitions.
• COS has scheduled to conduct the 2021 Annual General Meeting on 18 November 2021.

Stock Recommendation: The company closed FY21 with a cash balance of $4.18 million and net debt (including deferred consideration) position of $2.3 million. The stock of COS is currently trading near to its 52-week low level of $0.530, offering a decent opportunity for accumulation. The stock has been corrected by ~11.76% and ~3.22% in the past one and three months, respectively. On a TTM basis, COS has an EV/EBITDA multiple of 8.3x, compared to the industry average (Professional & Commercial Services) of 18.8x. Thus, it seems that the stock is undervalued at the current trading levels. Considering the valuation on a TTM basis, decent growth in revenue and EBIT, synergies from the recent acquisitions, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating at the closing price of $0.560 as on 08 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

COS Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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