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Blancco Technology Group — Encouraging finish to a difficult year

Blancco Technology Group — Encouraging finish to a difficult year

Blancco’s FY18 trading update confirms that despite weaker than expected revenue growth, work on reducing the cost base resulted in a better than expected operating margin of 11%. Positive cash flow in H2 reduced the net debt position to below our forecast. We have revised our forecasts to reflect lower revenues but stronger profitability, resulting in an upgrade to our normalised EPS forecasts of 49% for FY18e and 10% for FY19e. With the appointment of a permanent CFO, the new management team is now complete, and we expect more detail on strategy when the company reports FY18 results in September.

Katherine Thompson

Written by

Katherine Thompson

Director

Blancco Technology Group

Encouraging finish to a difficult year

Trading update

Software & comp services

11 July 2018

Price

74p

Market cap

£47m

$1.32:£1

Net debt (£m) at end FY18

2.8

Shares in issue

64.0m

Free float

95.6%

Code

BLTG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.9)

4.2

(36.5)

Rel (local)

(11.8)

(1.5)

(39.5)

52-week high/low

116p

48p

Business description

Blancco Technology Group develops and sells data erasure and mobile diagnostics software. Its headquarters are in the US and it has sales offices in 15 countries around the world.

Next events

FY18 results

25 September

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Alasdair Young

+44 (0)20 3077 5700

Blancco Technology Group is a research client of Edison Investment Research Limited

Blancco’s FY18 trading update confirms that despite weaker than expected revenue growth, work on reducing the cost base resulted in a better than expected operating margin of 11%. Positive cash flow in H2 reduced the net debt position to below our forecast. We have revised our forecasts to reflect lower revenues but stronger profitability, resulting in an upgrade to our normalised EPS forecasts of 49% for FY18e and 10% for FY19e. With the appointment of a permanent CFO, the new management team is now complete, and we expect more detail on strategy when the company reports FY18 results in September.

Year end

Revenue (£m)

Adj. operating profit* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/16

21.2

4.6

4.16

2.0

17.8

2.7

06/17

26.9

3.2

2.60

0.7

28.5

0.9

06/18e

27.2

3.0

2.89

0.0

25.6

N/A

06/19e

30.0

3.3

3.00

0.0

24.6

N/A

Note: *Adjusted operating profit (AOP) and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY18 operating profit ahead despite weaker revenues

Blancco expects to report modest revenue growth for FY18 (our forecast +5.6%). The rate of growth was not as strong as management expected (previous guidance was for reported growth at the lower end of the 6-16% range), and was negatively affected by the weaker pound during the period. For H218, the company saw a good rate of contract wins, with revenue growth of 7% y-o-y on a constant currency basis (our forecast +12% reported). Despite the weaker than expected revenues for the year, due to good cost control Blancco expects to report an adjusted operating margin of 11%, well ahead of our 8% forecast, towards the top end of the 8-12% guidance range, and significantly higher than the 6.6% reported in H118. Combined with good cash collection, this generated positive cash flow for H218 and net debt at year-end of £2.8m, below our £3.5m forecast.

Estimates raised; new CFO appointed

We have reduced our FY18 revenue growth forecast to 1% and maintain the 10% growth rate for FY19. On an 11% operating margin for both years (FY19 previously at 10%), this results in an upgrade to our normalised EPS forecasts of 49% for FY18 and 10% for FY19. The company has appointed a permanent CFO, Adam Moloney, to start on 23 July. We expect to hear more detail on group strategy when the company reports FY18 results on 25 September.

Valuation: Reinvigorating sales is key to upside

Blancco is trading on a P/E multiple of 25.6x in FY18e and 24.6x in FY19e, which is at a discount to UK and global cybersecurity peers. Upside to the share price from this point will depend on the company demonstrating progress in reinvigorating revenue growth, with a recovery in the end-of-life business a key factor in this. One-off licence deals could add materially to profitability.

Exhibit 1: Financial summary

£'m

2015

2016

2017

2018e

2019e

30-June

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

15.0

21.2

26.9

27.2

30.0

Cost of Sales

(0.5)

(1.9)

(1.1)

(1.2)

(1.5)

Gross Profit

14.6

19.3

25.8

25.9

28.5

EBITDA

 

 

4.2

5.4

5.0

5.5

6.5

Normalised operating profit

 

 

4.0

4.6

3.2

3.0

3.3

Amortisation of acquired intangibles

(2.0)

(2.5)

(2.5)

(2.5)

(2.5)

Exceptionals

(2.5)

(2.7)

(2.6)

(1.2)

0.0

Share-based payments

(0.4)

(1.2)

(0.7)

0.4

(1.0)

Reported operating profit

(0.9)

(1.7)

(2.6)

(0.2)

(0.2)

Net Interest

(0.5)

(0.3)

(0.3)

(0.3)

(0.4)

Joint ventures & associates (post tax)

(0.7)

(0.2)

0.0

0.0

0.0

Exceptionals

(0.3)

(0.6)

1.1

(0.0)

(0.2)

Profit Before Tax (norm)

 

 

2.8

4.1

2.9

2.8

2.9

Profit Before Tax (reported)

 

 

(2.4)

(2.8)

(1.8)

(0.5)

(0.8)

Reported tax

(0.9)

(0.6)

(0.7)

(0.0)

(0.1)

Profit After Tax (norm)

1.9

3.2

2.0

2.1

2.3

Profit After Tax (reported)

(3.3)

(3.5)

(2.5)

(0.5)

(0.9)

Minority interests

0.3

(0.2)

(0.6)

(0.3)

(0.4)

Discontinued operations

8.4

(22.2)

(1.9)

0.0

0.0

Net income (normalised)

2.2

3.0

1.5

1.8

1.9

Net income (reported)

5.4

(25.9)

(4.9)

(0.8)

(1.3)

Basic average number of shares outstanding (m)

78

72

57

62

62

EPS - basic normalised (p)

 

 

2.84

4.16

2.60

2.89

3.00

EPS - diluted normalised (p)

 

 

2.84

4.16

2.60

2.89

3.00

EPS - basic reported (p)

 

 

6.97

(36.20)

(8.59)

(1.31)

(2.07)

Dividend (p)

5.00

2.00

0.70

0.00

0.00

Revenue growth (%)

41.2

27.0

1.0

10.6

Gross Margin (%)

96.9

91.1

95.9

95.5

95.0

EBITDA Margin (%)

28.3

25.4

18.7

20.4

21.7

Normalised Operating Margin

26.8

21.7

11.9

11.2

11.1

BALANCE SHEET

Fixed Assets

 

 

119.1

67.3

66.6

64.9

62.5

Intangible Assets

110.2

66.9

66.2

64.4

62.0

Tangible Assets

6.4

0.4

0.4

0.5

0.6

Investments & other

2.5

0.0

0.0

0.0

0.0

Current Assets

 

 

56.2

16.2

20.2

14.6

16.7

Stocks

9.5

0.1

0.1

0.1

0.2

Debtors

34.6

6.6

8.4

8.5

9.4

Cash & cash equivalents

12.1

4.8

11.6

6.0

7.1

Other

0.0

4.8

0.0

0.0

0.0

Current Liabilities

 

 

(43.2)

(22.5)

(17.5)

(15.5)

(15.1)

Creditors

(40.5)

(13.4)

(14.0)

(11.0)

(12.9)

Tax and social security

(0.6)

(2.3)

(1.5)

(1.5)

(1.5)

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Other

(2.1)

(6.8)

(2.1)

(3.1)

(0.8)

Long Term Liabilities

 

 

(9.4)

(13.5)

(18.7)

(14.0)

(14.0)

Long term borrowings

(4.4)

(3.7)

(9.9)

(8.9)

(8.9)

Other long term liabilities

(5.0)

(9.8)

(8.7)

(5.1)

(5.1)

Net Assets

 

 

122.7

47.6

50.6

49.9

50.1

Minority interests

(0.2)

(0.5)

(1.0)

(1.1)

(1.5)

Shareholders' equity

 

 

122.4

47.1

49.6

48.8

48.6

CASH FLOW

Op Cash Flow before WC and tax

4.2

5.4

5.0

5.5

6.5

Working capital

0.8

0.9

(1.6)

(2.2)

0.9

Exceptional & other

2.8

(12.2)

(5.1)

(1.2)

0.0

Tax

(0.6)

(0.6)

(0.7)

(1.2)

(0.1)

Net operating cash flow

 

 

7.3

(6.6)

(2.5)

1.0

7.3

Capex

(1.8)

(2.5)

(3.4)

(3.3)

(3.4)

Acquisitions/disposals

(2.5)

(7.5)

(0.7)

(1.1)

(2.5)

Net interest

(0.4)

(0.2)

(0.3)

(0.3)

(0.4)

Equity financing

(3.6)

(50.7)

9.5

0.0

0.0

Dividends

(3.4)

(3.1)

(1.4)

(0.2)

0.0

Other

(6.5)

65.1

(0.4)

(0.8)

0.0

Net Cash Flow

(10.8)

(5.6)

0.84

(4.7)

1.1

Opening net debt/(cash)

 

 

(20.6)

(7.8)

(1.0)

(1.7)

2.9

FX

(1.9)

(1.2)

(0.1)

0.0

0.0

Other non-cash movements

(0.1)

0.0

(0.0)

0.0

0.0

Closing net debt/(cash)

 

 

(7.8)

(1.0)

(1.7)

2.9

1.8

Source: Blancco Technology Group, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Blancco Technology Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Blancco Technology Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Investment Companies

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