DX (Group) plc* Industrial Transportation. Successful HMPO tender improves forecast certainty. Price 17.75p. Price Performance. Financial Forecasts

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Claire Mason
5 years ago
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1 For FCA purposes this is a Marketing Communication DX (Group) plc* DX. LN Industrial Transportation Successful HMPO tender improves forecast certainty DX has confirmed that it has won the retendering of the HMPO contract. We understand that it was a highly competitive process so retaining the contract is especially pleasing and provides greater confidence looking forward. We leave forecasts unchanged but with materially increased certainty on being achieved. The successful retender highlights that the quality of service DX has delivered over the previous contract periods has been respected. The only disappointment in today s statement is the announcement that the decision on the resubmission of planning permission for the central hub has been delayed until mid-february. Today s announcement de-risks FY17 and FY18 earnings and net debt forecasts and highlights the attractiveness of the prospective 2.5p dividend in each year. We leave forecasts unchanged meaning DX is trading on just 3.6x FY17 earnings and yielding c.14% on last night s 17.75p closing price. A conservative 7x short term recovery multiple would equate to a 35p share price offering 97% upside, this would still only equate to 4.0x EV/EBITDA. Passport contract importance greater than its size In annual Group revenue terms the contract is worth a relatively small c. 20m - 25m but we believe the volume it provides for the important Secure division underpin the better economics of this area relative to other areas of the business. The Secure business grew at c.9.0% last year and should continue to grow strongly on the strength of its service offering and retaining HMPO volumes will underpin its economics. We understand it was a very competitive process and to win it shows the strength of DX s Secure offering. The only material change would appear to be the movement in length from 3+1 year contract term to a 2+2 year. Improved visibility in FY17 Whilst we don t ignore the intense competition in all areas of the deliveries market, the HMPO tender win materially increases the certainty of achieving FY17 PBT estimate of 12.2m. In turn, this would increase certainty on our assumptions of net debt falling to just c.0.3x EBITDA. With this low level of gearing it increases the attractiveness of the 2.5p dividend which equates to a 14% yield and is twice covered by earnings. Further confidence across the forecast period will be taken should Exchange experience a benign renewals season in January, albeit with the April renewal period still to come before the period end. Valuation Placing a recovery multiple of 7x on FY17 earnings would equate to a share price of 35p, offering c.97% upside. Arguably, this multiple is supported by the greater certainty today s announcement provides to earnings. The shares have recently gone ex-dividend 1.5p (10 th Nov) leading to a 1.75p fall to 17.75p. At this level the prospective yield of c.14.0% is appealing on a balance sheet with little debt as net debt declines to just 0.3x EBITDA. Price 17.75p Market Cap 35.6m No. Shares in Issue 200.5m 12m Trading Range 13.5p 27.5p Price Performance Nov 15 Feb 16 May 16 Aug 16 Nov 16 Source: Bloomberg Financial Forecasts Yr to June ( m) 2016A 2017E 2018E 2019E Revenue EBITDA PBT EPS (p) DPS (p) Yield (%) Net (Debt)/Cash (9.8) (5.7) (1.2) 3.2 EV/EBITDA (x) PER (x) Source: Audited Accounts and Zeus Capital estimates *Zeus Capital acts as Nominated Advisor and Broker to this company Analysts: Andy Hanson andy.hanson@zeuscapital.co.uk Zeus Capital Contacts: John Goold Adam Pollock Dominic King Ben Robertson Mike Cuthbert Victoria Ayton Dominic Wilson Hugh Kingsmill Moore Mike Seabrook Alex Davies Ronayne O Mahony firstname.surname@zeuscapital.co.uk Disclaimer: This research is intended for institutional investors only. It is not intended for retail customers and any retail customer should seek professional, independent advice before investing. For FCA purposes this marketing communication has not been prepared in accordance with legal requirements to promote the independence of investment research. Zeus Capital is not subject to any prohibition on dealing ahead of the dissemination of such investment research.

2 Financials Income Statement Year-end June ( m) 2014A 2015A 2016A 2017E 2018E 2019E Revenue Operating Costs (270.5) (263.8) (269.9) (287.7) (296.7) (301.0) EBITDA EBITDA margin (%) Depreciation (3.1) (3.4) (3.0) (3.0) (2.9) (2.8) Amortisation (2.6) (3.1) (3.1) (3.3) (3.3) (3.4) Adj EBITA EBITA profit margin (%) Other income Finance Costs (5.2) (0.5) (0.5) (0.6) (0.5) (0.4) PBT (adjusted) Tax paid (4.9) (4.9) (1.7) (2.3) (2.4) (2.4) Tax rate (%) PAT (adjusted) Shares in issue (m) EPS (p) Dividend DPS (p) Cover (x) Source: DX (Group)Plc and Zeus Capital Forecasts This document may not be distributed in or into Australia, Canada or Japan 2

3 Cashflow Statement Year-end June ( m) 2014A 2015A 2016A 2017E 2018E 2019E Profit before tax (54.3) Exceptional Items (3.3) Depreciation Amortisation Change in working capital (1.9) (2.7) 0.1 (0.2) (0.2) (0.4) Management charges Other (0.1) (0.1) (0.1) Cash generated from operations Finance costs/income (0.7) (0.4) (0.4) (0.6) (0.5) (0.4) Taxation paid 0.0 (2.9) (3.6) (2.0) (2.1) (2.4) Net operating cash flow Capital expenditure (6.2) (9.9) (5.7) (6.5) (6.5) (6.5) Free cash flow Acqusition 0.0 (1.8) (3.1) Deferred consideration Cash from investing (6.2) (9.2) (8.8) (6.5) (6.5) (6.5) New equity Net Proceeds / (Repayments) from Borrowings (234.3) (1.2) 5.3 (1.2) (1.2) (1.2) Dividends 0.0 (8.0) (10.0) (5.0) (5.0) (5.0) Net Finance lease Proceeds/(Repayments) (0.7) Cash from financing (50.0) (9.2) (4.7) (6.2) (6.2) (6.2) Additional adjustments 3.3 (3.4) Net increase (decrease) in cash (29.1) 5.9 (2.7) Cash and equivalents start of yr Cash and equivalents end of yr Debt (including finance leases) Current Non-current Finance Leases Total Net (Debt)/Cash (12.2) (1.8) (9.8) (5.7) (1.2) 3.2 Source: DX (Group)Plc and Zeus Capital Forecasts This document may not be distributed in or into Australia, Canada or Japan 3

4 Balance Sheet Year-end June ( m) 2014A 2015E 2016A 2017E 2018E 2019E Fixed Assets Intangible Assets Goodwill Associate Deferred tax Non current assets Inventories Trade Receivables Other Receivables Cash and equivalents Pre payments and accrued income Deferred tax Current Assets Total Assets Short term debt (incl finance leases) Other loans Trade Payables Other Payables Accruals and deferred income Provisions Tax payable Other Current liabilities Net current assets (19.8) (16.4) (24.5) (21.5) (17.9) (14.4) Debt (incl finance leases) Provisions Other Non current liabilities Total Net Assets Source: DX (Group)Plc and Zeus Capital Forecasts This document may not be distributed in or into Australia, Canada or Japan 4

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City of London Investment Group*

For FCA purposes this is a Marketing Communication City of London Investment Group* CLIG LN Tough 1H trading update Financials What s new. CLIG s 1H trading update released this morning reveals details