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G3 Group — Update 11 February 2017

G3 Group — Update 11 February 2017

G3 Group

Analyst avatar placeholder

Written by

G3 Group

Margins ahead of expectations

Industrials

NXT Company Spotlight

11 February 2016

Price

NZ$0.83

Market cap

NZ$45m

Share price graph

Share details

Code

GGL

Listing

NXT

Shares in issue

54.7

Business description

G3 Group operates three principal business divisions: tourist mail operations in the UK, business and retail mail operations in New Zealand and document management operations, primarily in New Zealand.

Bull

■

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.

■

G3 has successfully acquired and integrated a number of businesses in the last three to five years.

Bear

■

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

■

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

■

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

Analysts

Moira Daw

+61 (0)2 9280 1161

Finola Burke

+61 (0)2 9280 1161

G3 Group operates three businesses: a New Zealand-based business mail operation, a unique UK tourist mail business (Universal Mail UK) and document management in New Zealand and Australia. The performance for the third quarter that ended 31 December 2015 showed gross margin and inventory levels for the quarter and year to date above the key operating milestone (KOM) targets. The volume of items processed in the third quarter was below the KOM target, but is expected to increase in the fourth quarter with the resumption of services to a major bulk customer.

Key operating milestones

The quarterly update provides a progress report on G3's performance compared to the KOMs stated in the disclosure document. The reported 9M16 (to December 2015) operating margin of 21.5% (19.8% in Q316) is 140bp above the full-year target of 20.1%. In turn, the overall gross margin came in at 23.5% in 9M16 (21.9% in Q316) compared to the full-year target of 21.9%. The company expects the number of items processed for the full year will be 58.5m, some 5.8% below the original target of 62.1m. The UK business continues to perform well and in line with company expectations.

Acquisition of Formfile

G3 has acquired Australia-based Formfile Records Management Group for A$3.4m funded by the issue of ~656,000 shares at NZ$0.80 per share (A$500,000) and A$2.9m from the group’s bank funding lines. The acquisition of Formfile is in line with G3’s strategy of investing in transitional and complimentary ‘new technology’ services. Formfile’s business includes document and data management, which includes the conversion of physical paper documents into automated digital workflows. G3 sees its existing high-growth options as the UK tourist mail business and document management in New Zealand and Australia. It believes there are near-term industry consolidation opportunities in the physical mail business in both New Zealand and Australia.

Valuation: Trading at a discount to the market

The current share price of NZ$0.83 implies a market capitalisation of NZ$45.4m and an EV of NZ$54.2m based on September 2015 net debt of NZ$8.75m. This translates into an adjusted FY15e EV/EBITDA multiple of 12.6x (assuming FY15 pro forma full-year contributions from Filecorp and Eureka) compared with a peer group FY15e EV/EBITDA multiple of 12.0x (see Exhibit 4).

Historical financials

Year
end

Revenue
(NZ$m)

NPAT
(NZ$m)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/12

19.3

(0.5)

N/A

0.0

N/A

N/A

03/13

25.6

1.2

N/A

0.0

N/A

N/A

03/14

32.3

1.4

3.0

0.0

29.0

N/A

03/15

40.5

1.9

5.0

0.0

17.4

N/A

Source: Company data

Update for the period to 31 December 2015

Key operating milestones (KOMs)

In the disclosure document G3 defined its KOMs as:

■

gross margin: group revenue less cost of goods sold as percentage of revenue;

■

operating margin: revenue less gross margin plus 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; and

■

number of units processed: encompasses all product units sold including stamps, postage permits, envelopes and filing products.

The quarterly business update and 9M16 (to 31 December 2015) update showed that the company is on track to achieve all KOMs stated in the disclosure document with the exception of the number of units processed metric, which is now expected to be 3.6m units below the original full-year estimate of 62.1m. The margin improvement suggests that the margin estimates included in the disclosure document may have been conservative.

Exhibit 1: G3 Group – key operating metrics

2015

2016e

9M16 to
31 Dec 2015

2017e

Actual

Target

Actual

Estimate

Gross margin (%)

19.5

21.9

23.5

22.0

Operating margin (%)

17.6

20.1

21.5

20.2

Days sales in inventory

19.0

22.0

18.3

22.00

Number of processed units (m)

60.32

62.1

41.8

75.31

Source: G3 Group data

Acquisition of Formfile

The A$3.4m acquisition of Formfile Records Management Group is the first acquisition made by G3 since listing on the NXT. Key features of the business include:

■

Established for 30 years and based in Melbourne, Australia

■

Offers data management solutions for businesses of all sizes

■

Services allow customers to comply with Australian regulatory requirements for data retention and security

■

The services include advice on best-practice document workflows

■

Own storage facilities provide customers with an off-site storage option

■

Storage may also available at the customers’ premises or using the cloud

No acquisition metrics have been provided but the company has stated that the acquisition will not have a significant impact the KOMs for the year ending 31 March 2016. The acquisition is expected to be EPS positive.

Business segments

The current business of G3 comprises:

■

business mail in New Zealand (NZ Mail, Pete’s Post, Fastway Post and SEND);

■

tourism mail in the UK; and

■

filing and document management in New Zealand and Australia.

The table below uses data from G3 Group’s FY15 audited accounts, adjusted to include revenue and EBITDA from acquisitions made during FY15.

Exhibit 2: G3 Group – segment revenue and EBITDA FY15

(NZ$000)

Revenue

EBITDA

EBITDA margin

NZ Mail operations

35,078

1,766

5.0%

UK Mail operations

5,449

1,983

36.4%

Filing and document management

1,978

374

18.9%

Total

42,505

4,123

9.7%

Source: G3 Group disclosure document

Selected financial information

The table below combines the data from G3 Group’s disclosure document and its audited financial statements.

Exhibit 3: G3 Group selected financial information FY15

(NZ$'000)

Actual

Reported

Including
acquisition*

Pro forma

FY12

FY13

FY14

FY15

FY15

FY15

NZ Mail

27,643

35,078

35,078

35,078

UK Mail

4,617

5,449

5,449

5,449

Filing and document management

1,978

3,500

Total revenue

19,289

25,605

32,260

40,527

42,505

44,027

EBITDA

2,199

2,868

3,215

3,749

4,123

4,294

EBIT

513

2,781

3,050

3,593

N/A

N/A

NPAT

-545

1,176

1,363

1,909

N/A

N/A

Dividends

196

4

Total assets

21,075

23,290

24,328

27,999

Cash and cash equivalents

2,460

2,339

2,455

815

Total liabilities

19,964

21,076

20,717

18,060

Total debt

12,395

16,132

14,266

9,148

Net cash flow from operations

1,431

-389

4,182

3,365

EBITDA margin

11.4%

11.2%

10.0%

9.3%

EBIT margin

2.7%

10.9%

9.5%

8.9%

NPAT margin

N/A

4.6%

4.2%

4.7%

Net debt

9,935

13,793

11,811

8,333

Equity

1,111

2,214

3,611

9,940

Average net debt

11,864

12,802

10,072

Average equity

1,663

2,913

6,776

ROCE

20.6%

19.4%

21.3%

ROE

70.7%

46.8%

28.2%

Source: G3 Group disclosure document, G3 Group financial statements; *Note: Acquisition comprises Filecorp and Eureka.

Comparative company analysis

There are no relevant, directly comparable listed companies. We believe the best comparator is Salmat (SLM.ASX) because its business includes aspects of the mail business and digital data management. It does have other businesses, including its letterbox delivery business (junk mail including catalogues). Freightways has a directly comparable business. However, it is a small part of the overall business, which is in the main a freight/courier business. Both Iron Mountain and Recall are only partially relevant because of their size and the emphasis on document management rather than mail.

Exhibit 4: G3 Group – comparable companies

Ticker

CCY

Price

Market
cap

P/E

EV/EBITDA (x)

EV/EBIT (x)

Yield (%)

($)

($m)

FY15e

FY16e

FY15e

FY16e

FY15e

FY16e

FY15e

FY16e

Recall Holdings

REC.ASX

A$

6.57

2,070

25.8

18.1

12.7

9.16

21.0

13.6

2.8

3.7

Salmat

SLM/ASX

A$

0.65

104

-

15.9

0.0

3.9

-

9.8

0.0

2.6

Iron Mountain

IRM.NYSE

US$

25.83

5,450

23.3

20.6

11.1

10.1

17.5

16.1

7.4

7.6

Freightways

FRE.NZX

NZ$

6.21

961

20.7

17.3

12.3

10.9

14.7

12.7

4.1

4.5

Peer group average

23.3

18.0

12.0

8.6

17.7

13.1

3.6

4.6

Source: Bloomberg. Note: Prices as at 28 January 2016.

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Pennon — Update 10 February 2017

Pennon

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