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G3 Group — Update 13 June 2016

G3 Group — Update 13 June 2016

G3 Group

Analyst avatar placeholder

Written by

G3 Group

NPAT up 12.2% for FY16

Industrials

NXT Company Spotlight

13 June 2016

Price

NZ$0.81

Market cap

NZ$44m

Share price graph

Share details

Code

GGL

<Insert>

Listing

NXT

<Insert>

Shares in issue

54.5

<Insert>

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.

<Insert>

Bull

■

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

■

<Insert text or delete this table row>

■

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

■

<Insert text or delete this table row>

■

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.

■

<Insert text or delete this table row>

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

Moira Daw

+61 (0)2 9258 1161

Finola Burke

+61 (0)2 9258 1161

G3 Group (GGL) operates three businesses: document and data management in NZ and Australia, a unique UK-based tourist souvenir business and a business mail operation in NZ. The audited FY16 financial results showed NPAT of NZ$2.14m, which was 12.2% ahead of FY15 and included a PBT contribution of NZ$0.040m from Formfile Records Management Group, acquired on 20 January 2016, as well as costs associated with IPO and introduction of an employee share scheme totalling NZ0.227m and NZ$0.345m respectively.

FY16 EBITDA grew more than revenue

EBITDA grew 15.7% y-o-y in FY16, compared with a revenue increase of 8.4%. The NZ mail business accounted for 77% of revenue and 37% of segment profit (defined as profit before overheads, interest and tax). The UK business produced 13% of revenue and 48% of segment profit and the documents management businesses in NZ and Australia accounted for 10% of revenue and 15% of segment profit (see Exhibit 1). Return on the purchase price of Formfile was 3.6% after adjustment for a full year’s contribution and using a tax rate of 30%. Overall FY16 ROE using average equity was 19.1% compared to 28.2% in FY15.

Growth expectations remain positive

On 31 May 2016 the company advised that following a review of its current key operating metrics (KOMs) and after consultations with its NXT adviser it was decided that the number of units processed KOM did not meet the NXT standard due to changes in the overall product and service mix and associated margins of each. The three continuing KOMs and the targets for 31 March 2017 were confirmed as gross margin as a percentage of revenue of 22%, operating margin of 20.2% and days sales of inventory of 22 days. The next report of KOMs for the period ended 30 June 2016 will be released on or before 28 July 2016. The annual financial statements (Note 12 regarding goodwill impairment testing) provide expected revenue growth parameters used in the goodwill impairment testing. Revenue growth is expected to be between 6-20% for the different businesses in FY17 and between 1-7% for the four years thereafter to FY21. GGL did not provide any earnings guidance for FY17.

Valuation: Small premium to peers

The current share price of NZ$0.81 implies a market capitalisation of NZ$44m and an enterprise value (EV) of NZ$54m (using 31 March 2016 net debt of NZ$9.9m). This translates to an FY16 EV/EBITDA multiple of c 12.4x, compared with peers Salmat on 4.0x and Freightways on 12.2x. Both comparable companies have 30 June financial year ends. Management advises that a capital raise remains a possibility if suitable acquisition opportunities arise.

Historical financials

Year
end

Revenue
(NZ$)

NPAT
(NZ$)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/14

32.3

1.4

3.0

0.0

27.0

N/A

03/15

40.5

1.9

4.8

0.0

16.9

N/A

03/16

43.9

2.1

4.1

0.0

19.8

N/A

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

A strong trading result in FY16

GGL, through a combination of tight cost control, successful integration of the Formfile Australia business and strong growth in the higher-margin NZ/Australian document management and UK souvenir business, turned an 8.4% increase in revenue into a 15.7% increase in EBITDA. NPAT increased by 12.2% after including one-off costs related to the float of NZ$0.227m and after including, for the first time, costs related to the employee share scheme of NZ$0.345m.

Key highlights from the FY16 results include:

■

Increased sales and margins from the Filecorp and Eureka document management businesses acquired in 2014.

■

The successful integration of Formfile Australia business as part of a strategy to move from ‘old technology’ paper-based services into transitional and complementary new technology digital based services

■

Increased sales achieved by the UK mail business from the addition of new sites for the sale of souvenir stamps including National Trust of Scotland, Tate Enterprises, Houses of Parliament, Westminster Abbey, Buckingham Palace and Windsor Castle.

■

NZ-based business mail brands continued to increase market share with the addition of new large and small-scale customers.

■

The successful integration of five acquisitions made in the last three years.

Exhibit 1: Segment profit FY15 and FY16

Mail NZ

Mail UK

Doc NZ

Doc Aus

Total

Segment profit FY16 (NZ$m)

Revenue

33.8

5.8

3.6

0.7

43.9

EBITDA before corporate costs

2.1

2.5

1.0

0.1

5.7

EBIT before corporate costs

1.9

2.5

0.8

0.0

5.2

Corporate costs

(1.7)

Interest

(0.5)

Other

0.0

NPBT

3.0

Increase in revenue

8.4%

Increase in EBITDA before corporate costs

42.3%

Increase in EBIT before corporate costs

35.9%

Increase in corporate overheads

515.7%

Increase in NPBT

16.3%

EBITDA % before corporate costs

6.2%

43.0%

27.3%

14.7%

12.9%

EBIT % before corporate costs

5.7%

42.9%

21.4%

3.7%

11.9%

Segment profit FY15 (NZ$m)

Revenue

35.1

5.4

40.5

EBITDA before corporate costs

2.0

2.0

4.0

EBIT before corporate costs

1.9

2.0

3.8

Corporate costs

(0.3)

Interest

(1.0)

Other

(0.0)

NPBT

2.6

EBITDA % before corporate costs

5.7%

36.3%

9.9%

EBIT % before corporate costs

5.3%

36.2%

9.5%

Source: G3 Group data

Exhibit 2: Historic financial results

NZ$m

2012

2013

2014

2015

2016

Variance 2015/16

Revenue

19.3

25.6

32.3

40.5

43.9

8.4%

Other income

0.1

0.0

Total Revenue

19.3

25.6

32.3

40.6

44.0

8.3%

Expenses

COGS

31.7

32.6

2.7%

Change in inventories

0.0

(0.1)

NM

COGS (adjusted for change in inventories)

31.8

32.5

2.3%

Gross Profit

8.8

11.5

29.9%

Facility management costs

1.0

1.1

1.7%

Share-based payments

0.3

NM

Staff costs

2.1

3.4

66.8%

Property operating costs

0.2

0.4

61.2%

Other premises costs

0.1

0.1

148.3%

Audit fees

0.1

0.1

(47.9%)

Other professional fees

0.1

NM

Other expenses

1.6

2.0

25.2%

Total costs*

5.1

7.5

46.2%

EBITDA

2.2

2.9

3.2

3.8

4.3

15.7%

Depreciation

0.1

0.1

63.9%

Amortisation

0.1

0.4

316.7%

Total Depn and Amort

0.2

0.5

200.0%

EBIT

0.5

2.8

3.1

3.5

3.9

(1.2%)

Float costs

(0.2)

NM

Employee Share Scheme costs

(0.3)

NM

Net interest

(1.0)

(0.5)

(48.7%)

NPBT

2.6

3.0

16.2%

Tax

(0.7)

(0.9)

27.5%

NPAT

(0.5)

1.2

1.4

1.9

2.1

12.2%

EBITDA %

11.4%

11.2%

10.0%

9.1%

9.9%

EBIT %

2.7%

10.9%

9.5%

8.7%

8.8%

EPS (NZ cents per share)

4.8

4.5

(6.3%)

EPS diluted (NZ cents per share)

4.8

4.1

(14.6%)

Source: G3 Group data. Note * total costs include float costs and employee share scheme costs

Exhibit 3: Revenue, EBITDA, EBIT, NPAT FY12-16

Exhibit 4 EBITDA and EBIT margins FY13-16

Source: G3 Group data. Note: FY16 EBITDA and EBIT are before float costs and employee share scheme costs.

Source: G3 Group data

Growth expectations

G3 Group has not provided earnings guidance, however, some insights are available from the impairment of intangibles (Note 12) in the notes forming part of the FY16 audited financial statements. The assumptions used to test the present value of the goodwill relating to the cash generating units (CGU) and to determine if an impairment charge is required, are set out in the table below:

Exhibit 5: Assumptions used in FY16 impairment testing

2017

4 years to 2021

Revenue growth pa

UK mail

6%

5-7%

NZ mail

20%

1-2%

NZ doc management

8%

5%

Operating costs % of revenue

UK mail

17%

17-18%

NZ doc management

27%

27%

Operating cost increase pa

NZ mail

1%

1%

LT growth rate (terminal)

UK mail

2%

NZ mail

2%

NZ doc management

2%

Discount rate

UK Mail

14.2%

NZ Mail

16.1%

NZ doc management

16.1%

Source: G3 Group data, Note 12 to FY16 financial statements

Delivering on strategy

GGL stated when it listed on the NXT that its focus for growth would be to:

■

;everage its traditional mail services businesses;

■

expand via acquisition into document and data management;

■

expand its business offering into Australia; and

■

begin transition to B2B and B2C digital transaction services.

The company has addressed each of these objectives through strategic acquisitions. Its acquisition of Formfile (acquisition price of NZ$4.3m, acquired 20 January 2016 effective from 1 January 2016) has seen G3 expand its document and data management businesses in both NZ and Australia. The acquisition of Rocket Mail (effective 1 April 2016), an Auckland-based data management and mailing house operation, allows GGL to leverage its traditional mail businesses and continue to gain economies of scale. There is scope for G3 to expand both document and data management into the UK.

Key operating milestones (KOMs)

In the disclosure document, GGL 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 FY16 (to 31 March 2016) update showed that the company had achieved all KOMs stated in the disclosure document with the exception of the number of units processed metric, which was 3.6m units below the original full-year target of 62.1m (forecast three months ago). On 31 May 2016 GGL released to the market a ‘review of operating milestones’ made in conjunction with its NXT adviser. This review stated that due to recent changes in the business mix the KOM “number of units processed” metric is no longer relevant and will be discontinued from 31 March 2016.

Exhibit 6: G3 Group’s key operating metrics

2015

2016

2016

2017

Actual

Target

Actual

Target

Gross margin (%)

19.5

21.9

22.9

22.0

Operating margin (%)

17.6

20.1

20.8

20.2

Days’ sales of inventory (# of days)

19.0

22.0

20.9

22.00

Number of units processed (m)

60.32

62.1

58.5

75.31*

Source: G3 Group. Note: *The number of units processed has been removed as a KOM after a review released to the NXT market on 31 May 2016. All other KOMs are unchanged.

Business outlook

Management advises that it continues to be well placed for growth. It will continue to report its performance on a quarterly basis using three key operating metrics. GGL management notes that the company has recorded five years of solid earnings growth, demonstrating year-on-year sustainable growth through the development of market leading brands.

Acquisitions remain on the company’s agenda. Management stated that it is currently examining a number of acquisition opportunities in the document and data management technology business. It has also flagged a possible capital raise to assist the company with its expansion plans.

Comparative company analysis

There are no relevant, directly comparable listed companies. In our view, the closest comparator is Salmat (SLM.ASX) because its business includes aspects of the mail business and digital data management. It does have other businesses, including a letterbox delivery business (junk mail, including catalogues). Recent poor performance has affected Salmat’s valuation. While Freightways has a directly comparable business, it is a small part of the overall business, which is mainly a freight/courier business. We have not included Iron Mountain (NYSE:IRM) due to its size (US$7.8bn) post its recent acquisition of Recall (REC.ASX). We had previously included Recall as a comparative company.

Exhibit 7: Comparable companies

Ticker

CCY

Price

Market cap

P/E (x)

P/E (x)

EV/ EBITDA (x)

EV/ EBITDA (x)

EV/EBIT (x)

EV/EBIT (x)

Yield
(%)

Yield
(%)

($)

($m)

FY16e

FY17e

FY16e

FY17e

FY16e

FY17e

FY16e

FY17e

Salmat

SLM.ASX

A$

0.47

75.1

47.0

10.4

4.0

3.2

17.8

7.5

0.0%

3.6%

Freightways

FRE.NZX

NZ$

6.83

1,057.0

19.4

17.9

12.2

11.5

14.1

13.2

3.6%

4.0%

Peer group average

33.2

14.2

8.1

7.4

16.0

10.3

1.8%

3.8%

G3 Group

GGL.NXT

NZ$

0.81

44

19.8

N/A

12.2

N/A

15.4

N/A

N/A

N/A

Source: Bloomberg. Note: Prices as at 8 June 2016.

Financials

Net debt of NZ$9.9m of 31 March 2016 equates to 2.3x FY16 EBITDA. The company remains comfortable with both FY16 net debt levels in terms of gearing 44% (net debt/net debt plus equity) and with FY16 EBIT interest cover of 7.2x.

Management advises that GGL has not declared a dividend for FY16 as it increases its cash reserves ahead of possible acquisitions.

Exhibit 8: Cash flow statement FY15 and FY16

Year end 31 March, NZ$m

2015

2016

Net operating cash flow

3.4

2.4

Acquisitions

(1.4)

(2.9)

PPE

(0.0)

(0.2)

Other

0.2

Total investing cash flow

(1.2)

(3.1)

Borrowings

(3.3)

1.7

Equity

0.1

Interest

(0.5)

(0.4)

Dividends

(0.4)

Total Financing cash flows

(3.8)

0.9

Increase (decrease) in cash

(1.6)

0.3

Exchange fluctuations

(0.0)

(0.0)

Cash at beginning of year

2.5

0.8

Cash on hand end of year

0.8

1.1

Source: G3 Group data

Exhibit 9: Balance sheet for FY15 and FY16

Year end 31 March, NZ$m

2015

2016

Non -current assets

PPE

0.3

1.5

Intangible assets & goodwill

19.5

22.6

Equity accounted investments

0.0

0.0

Total non-current assets

19.8

24.1

Current assets

Inventories

1.7

1.7

Receivables and prepays

5.5

6.3

Cash

0.8

1.1

Total current asset

8.1

9.1

Total assets

27.9

33.2

Non-current liabilities

Loans

2.7

9.1

Other payables

0.0

0.3

Deferred tax liability

0.6

0.9

Total non-current liabilities

3.3

10.3

Current liabilities

Trade and other payables

7.6

7.4

Taxation payable

0.3

0.7

Employee benefits

0.2

0.4

Loans

6.5

1.9

Total current liabilities

14.7

10.4

Total Liabilities

18.0

20.7

Net assets

9.9

12.5

Equity

Share capital

5.4

6.0

Other reserves

(0.0)

0.2

Retained earnings

4.6

6.3

Total equity

9.9

12.5

Source: G3 Group data

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Research: Energy & Resources

Canacol Energy — Update 13 June 2016

Canacol Energy

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