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Full year results confirm a significant margin hit in FY16 from expansion into new verticals, and from investment in the core paid search cable affiliate market. Revenue growth of 19% was in line with July’s update, but EBITDA fell even more than indicated in July ($2.5m rather than $3.1m, impacted by a $0.8m revenue reversal). Going forwards, DGS remains confident that the investments made in FY16 should drive good revenue growth and a recovery in margins back towards historic levels (mid-teens). We trim our forward estimates, but continue to forecast strong recovery in EBITDA going forwards. DGS remains cash generative, soundly financed (net debt $0.2m) and continues to pay a decent dividend (4% trailing yield). Valuation is very low even on these reduced estimates (6x EPS, 3.6x EBITDA, 13% FCF yield, 0.3x revenues). This reflects the volatile profits record, but suggests strong re-rating potential if management can deliver on a sustainable recovery in margins.
Digital Globe Services
In a mixed update, DGS has reduced profit expectations for the year to June, reflecting cost pressures. Revenue growth is ahead of forecasts, the group has made progress on diversifying into new sectors, and the company expects to regain lost margin going forwards. We cut FY16E EBITDA from $4.4m to $3.1m, but leave forward estimates unchanged ($5.7m for FY17E, $6.9m for FY18E). The stock offers strong growth prospects, with no Brexit risk (all USD revenues and costs) at a low valuation (7x FY17E EPS, 11% FCF yield). We maintain our 125p Target price. Near term though, firm evidence of margin recovery will probably be required for the stock to make progress.
Interim results confirm a return to strong and profitable growth, following a period of client disruption. We believe DGS, a performance-based digital marketing and call centre business, can continue to grow with its core clients (US cable and telecom groups) but also has a large opportunity in new markets as it looks to diversify more aggressively into new sectors. We forecast good double digit revenue growth, solid profit margins, and improving rates of cash conversion, allowing the group to maintain high dividend distributions. Valuation looks very low relative to this growth profile at just 3.6x EBITDA, 6.0x EPS and 7.1x FCF (FY17E) with a dividend yield of 6.3%. We initiate with a Buy rating and 125p Target Price.
DGS has appointed Simon Lee as a new Non-Executive Director in the company, replacing Amit Basak who will now be fully devoting his time in a separate company. Simon is currently an International Advisor with Fairfax Financial, Chairman of Osirium Ltd, Non-Executive Director of TIA Technology and Chairman of Hospice in the Weald. Simon has extensive experience in international finance services with 17 years with the National Westminster Bank Group and until Dec 2013, was Group CEO of RSA Insurance Group. Simon’s wide-ranging experience should be of huge benefit to the group, given its focus on growing geographically and in new verticals. As a reminder, DGS had a positive Q1 update indicating continued momentum. We view the 10.5x P/E Jun’16 rating as highly attractive.
DGS announced today that the strong trading momentum as reported in the full year results (FY ending June 2015) has continued through the first quarter of the new financial year. Adjusted EBITDA margin in Q1’16 continued to improve vs. that achieved in H2’15. We are not making any changes to our forecasts and are highly encouraged by the trajectory not only within its principal clients but also in new markets. At 6.8x EV/EBITDA Jun’16 (10x P/E), supported by a 4% dividend yield, we believe there is significant room for the shares to re-rate. The group will also be hosting a Capital Markets Day today which should give a better understanding of its market opportunities and how well-placed the group is to exploit them.
DGS has a strong track record of delivery, using its technology and online assets to convert new leads and drive revenue for its clients in the telecom, cable, satellite, high-speed internet and higher education industries. These clients, the majority of which are some of the largest enterprises in the world, trust DGS with their brand. We believe these customers are once again turning to DGS to help drive growth after a period of merger distraction. Combined with DGS’s efforts to develop new areas of growth, we believe the risk: reward profile is attractive and valuation compelling.
DGS’s full year results should go a long way to rebuild confidence in the group’s delivery and future prospects. Revenues and adjusted EBITDA showed a strong recovery in H2 vs. H1, the Board is recommending a $1.15m dividend (c.5% dividend yield) alongside a $0.5m share buyback and the group is confident of profitable growth for the year ahead. We made no changes to our 2016 and 2017 forecasts at this stage but our confidence in their achievability has grown. Valuation is compelling at 8.5x Jun’16 P/E. If we assume a 10% beat on Jun’16 numbers and a re-rating to 12x P/E, for example, this would deliver 50%+ upside over current levels.
DGS issued a trading update confirming it is on track to deliver adjusted EBITDA for the year ending 30 June 2015 in line with market expectations (N+1Se: $2.56m). We believe having been heavily impacted by client merger talks in H1’15, DGS is starting to see some stability in its core cable customer base and is also making progress against its strategic objectives of diversifying into other verticals and geographies. There is room for a significant re-rating once investor confidence returns – today’s statement is a solid first step.
Digital Globe Services (DGS LN) Reassuring trading update | Immunodiagnostic Systems Holdings (IDH LN) Prelims in line – outlook remains challenging | MJ Gleeson (GLE LN) Finishing FY15 with a flourish | Thorntons (THT LN) 145p recommended offer is a satisfactory exit for shareholders
DGS IDH GLE
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