Hi everyone,
I don't know whether you've had the time to do the analysis just yet, but here's a quick summary of how I see it:
The Bad:
- Drop-kick CEO ran this into the ground this H1, I don't feel the new star businesses were integrated AT ALL
- Finally the write down of the commucations business, the pinch is felt.
The Not-So-Bad:
- Consulting business became more profitable (albeit a slight drop in revenue) (which means better utilisation of resources, etc)
- Security business grew in EBIT (albeit a decline in revenue), which can be attributable to a number of things, such as poor intergration, timing, etc, etc etc
The Good:
- The Board is finally doing something about the poor performance. FINALLY.
The Great:
- new CEO - *standing ovation from any shareholder*. McLaine was an ABSOLUTE drop-kick, so bringing it Glenn Fielding (google him, he's the one behind growing UCX, DWS and others from a tiny IT company into a massive comprehensive businesses, and has all the connections. And yes, he IS the brother of the RXP Services CEO. (merger or takeover possibility, why not?)
- Bringing in a heavy hitter, who has restructured and grew top IT consulting businesses is probably the best news I've heard in a year in the IT sector. He has ALL the right connections to grow the business, but also to fully restructure and integrate the existing businesses.
Summary:
1. The spin-off of security PLUS communications business is announced. Very surprised that they didn't try to sell the Comms business, but I guess with the current profitability, it's an absolute DOG to try and flog. My assumption is that under the new CEO, they will restructure it and try to sell it off - would only be logical.
2. Bringing in a heavy hitter like Glenn Fielding, will both increase revenue (he's got ALL the industry connections and people follow him in every company he runs, he trippled DWS and UCX during the 5 year CEO stunt he did there - google his track record and you'll see what I meant) and restructure the existing business
3. Where to from now?
- I think that the first 6 months will be dedicated to growing revenue and increasing EBIT (logical) in order to increase valuation of the new business
- Once security and comms becomes a new listed entity, by that time they will try to flog off the dead horse that is the Comms business, otherwise will try to enhance it and eventually sell it. The announcement clearly says that the new listed company will focus on SECURITY ONLY. read between the lines.
- The consulting business is growing, revenue will probably be up 5% YoY, but profitability will be up as Glenn will probably push low senior management performers out
4. Let's do the math
Worst case scenario for the listing of Comms + Security. I'm assuming an EBIT ratio of 6x (which is quite low in a growing IT sector, but hey, performance hasn't been great, so the investment banking analysts won't apply a higher ratio)
Expectation for Comms: EBIT of $0.7m- $1m for FY17 (end of year) - this is very realistic, comms business is heavily skewed towards H2
Expectation for Security: EBIT of $4m- $4.5m for FY17 (end of year) - this is very realistic as well, I'm surprised that they haven't done better
Total EBIT for the new business: $4.7-5.5m... on a ratio of 6x, the rough valuation is $28m-$33m.
Expectation for IT Consulting: EBIT of $4.7m- $5.2m for FY17 (end of year) - this is very realistic to achieve
Given the fact that the IT Consulting business will hold on to the balance sheet and the legacy of all the debt, plus IT services would trade at a lower valuation (I'm assuming 5x), I'm assuming that the value of the "mother" company should be around $24m.
Total cap of the combined entity should be $52m-$57m, which equates to $0.80-$0.87.
Current cap is $20m (at the time of writing, the share price is $0.30).
Does anyone see the market opportunity?
1. Glenn (new CEO) will get more analyst following and fundy backing
2. The business will be restructured, fat cut and people will either have to step up or step out
3. the Comms business once restructured will be flogged off (remember, the new entity has only one focus, SECURITY, so read between the lines)
PS&C has been trading at such low multiples because of the weak leadership, poor integration and dropping results.
This is in the process of being sorted. I might be an optimist, but I think that all the structural issues have finally been addressed, if the follow through occur, we are likely to see the fair value levels of $0.80-$0.87 if not higher in 2017.
Good luck everyone!
PS. The stock dumping that's occuring today is just short-term traders or panickers who can't see value in a turn-around business. While it is depressing to look at it from a short term perspective, I can finally sleep easy, knowing that the structural issues to fix and grow this business have been addressed.
Expand
