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G3 Group — Update 1 December 2016

G3 Group — Update 1 December 2016

G3 Group

Analyst avatar placeholder

Written by

G3 Group

Core outperformance in H117

Industrials

NXT Company Spotlight

1 December 2016

Price

NZ$0.62

Market cap

NZ$34m

Share price graph

Share details

Code

GGL

Listing

NXT

Shares in issue

54.5

Business description

G3 Group operates three principal business divisions: document and data management in NZ and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ.

Bull

■

Experienced board and management with the broad-based skills necessary to drive the acquisition strategy.

■

Experienced board and management with the broad-based skills necessary to drive the acquisition strategy.

■

The businesses are currently profitable and there has been a track record of profitability and growth.

■

The businesses are currently profitable and there has been a track record of profitability and growth.

■

G3 has successfully acquired and integrated a number of businesses, especially in the last two years.

■

G3 has successfully acquired and integrated a number of businesses, especially in the last two years.

■

Newly acquired Formfile business has wide market appeal in Australia despite its relatively small size.

■

Expansion from business mail in NZ has begun with the Rocket Mail data management acquisition.

■

Expansion from business mail in NZ has begun with the Rocket Mail data management acquisition.

Bear

■

Dependent on access agreements in NZ and the UK where conditions may change and have an adverse impact on the business.

■

Transformation to new digital media is underway but is still early stage.

■

The nature of the current business mix limits the EBITDA margin to 10%, but the planned move into the digital arena and further expansion into document and data management should enable G3 to bolt on higher-margin businesses.

Analysts

Jamie Aitkenhead

+44(0)20 3077 5746

Roger Johnston

+44(0)20 3077 5722

G3 Group (GGL) operates three businesses: document and data management in New Zealand and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ. The performance for the six months ending 30 September 2016 showed a significant improvement versus the same period a year earlier, with underlying EBITDA growing by 24.9%. Strong growth in a G3 core home market of New Zealand post was one of the main drivers behind its strong performance. Furthermore, several bolt-on acquisitions continue to perform well, with the company announcing that it plans to continue looking for acquisition targets in its key markets.

Mail NZ drives improvement but UK softer

G3’s Mail New Zealand unit (78.9% H117 revenues) was the standout performer during the first six months of the year. Its three businesses – NZ Mail, Pete’s Post and Fastway Post – performed well over the half due to a combination of growing market share and by benefiting from the July increase in the postage rate in New Zealand, which had the effect of encouraging customers to stockpile prepaid post. This brought forward a sizeable amount of H2 sales into H1 and drove the 43% increase in its half-on-half revenues. Tourism UK (9.3% H117 revenues) reported a sales decline of 18% owing to a soft UK tourist season, but the relatively modest contribution of this business in a group context limits the negative impact. The larger scale and profitability of the NZ business, together with a reduction in operating expenses, converted to a 50.1% increase in group PBT.

Strategy remains focused on acquisition growth

Bolt-on acquisitions have proved to be an efficient way for G3 to expand its business and service offerings into adjacent markets and to diversity the business away from the declining market for traditional mail. Rocket Mail and Tidy Files are two examples of this trend witnessed in FY17 and both are integrating well. The company is not paying a dividend in FY17 “to increase its cash reserves for future acquisitions”. We highlight the UK as a prime potential market for future bolt-on acquisitions; specifically in the tourist collateral segment.

Valuation: Trading at 11.0x EBITDA

The current share price of NZ$0.62 implies a market capitalisation of NZ$33.8m and an EV of NZ$47.57m based on headline net debt of NZ$13.77m at 30 September 2016. This translates to a trailing (FY16) EV/EBITDA of 11.0x based on the company’s reported FY16 EBITDA of NZ$4.34m.

Historic financials

Year
end

Revenue
(NZ$m)

PBT
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/14

32.3

1.4

3.0

0.0

20.7

N/A

03/15

40.5

1.9

4.8

0.0

12.9

N/A

03/16

43.9

2.1

4.1

0.0

15.1

N/A

Source: G3 Group. Note: EPS refers to diluted earnings per share.

Business update

GGL reported the following highlights in its H117 business update:

■

GGL’s Mail NZ businesses – NZ Mail, Pete’s Post and Fastway Post – performed very well during the first six months. The group won significant new business volumes and there was a positive effect due to customers stockpiling prepaid product before the postage rate increase in July. The effect of the latter was to bring forward some sales from H2 to H1.

■

Its Document Management businesses in Australia and New Zealand have continued to perform well via a mixture of organic growth, market share gains and increased operating margins. The Document Management business has also integrated the Tidy Files acquisition well. The acquisition of Tidy Files, although small, is consistent with the group’s strategy of expanding its document management capabilities into Australia.

■

Mail NZ also acquired Rocket Mail, a small Auckland-based mail house and data management business. The business is complementary to GGL’s other businesses and brings higher-margin products and services such as digital invoice delivery and marketing and reporting communications, and has been performing well since it was acquired in April.

■

GGL’s UK unit, Tourist Collateral UK, experienced a softer first half than expected during peak UK tourist season, although management said that new business activity was better in late summer.

■

Corporate overheads declined to $1.05m from $1.46m due to the one-off nature of last year’s NXT listing and acquisition costs.

Outlook

The company expects operational cash flow generation to remain strong for the remainder of the year. Management has stated that it will not pay a dividend this year as it looks to conserve cash for future acquisitions. This is a continuation of the strategy that has seen G3 expand into adjacent market segments such as document and data management. The Digital Office service suite launched in Australia this year is an example of this, although management highlighted that its traditional mail divisions are proving resilient. The only significant weak spot for G3 in H1 was in the UK, although management has indicated that the unit saw improved conditions later in the summer.

Key operating milestones (KOMs) H117

In the disclosure document, GGL defined its KOMs as:

■

gross margin: group revenue less cost of sales as percentage of revenue.

■

operating margin: revenue less gross margin less the direct variable costs of production as percentage of revenue.

■

days' sales of inventory: the number of days’ sales it will take to clear the inventory.

Exhibit 1: G3 Group’s key operating metrics

2015

H116

2016

H117

2017

Actual

Actual

Actual

Actual

Target

Gross margin (%)

19.5%

24.4%

22.9%

23.2%

22.0%

Operating margin (%)

17.6%

22.2%

20.8%

21.3%

20.2%

Days’ sales of inventory (# of days)

19.0

17.6

20.9

42.9

22.0

Source: G3 Group

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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DISCLAIMER
This report has been commissioned by NZX Limited (“NZX”) and prepared and issued by Edison Investment Research (NZ) Limited (“Edison”). This report has been prepared independently of NZX and does not represent the opinions of NZX. NZX makes no representation in relation to acquiring, disposing of or otherwise dealing in the securities referred to in this report.

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