We initiate coverage on Crossrider following a period of significant change for the Group which has brought new management and a new strategy. The Group remains well-funded with cash of U$70.2 million as at the end of June 2016. We suggest that investors take time to view the considerable changes at Crossrider and its focused strategy for organic and acquisitive growth. Recently, Crossrider announced the purchase of DriverAgent for U$1 million – a product already successfully promoted on Crossrider’s app distribution platform. This bolt-on acquisition is the first under the new management team with more such deals likely. Crossrider’s management have suggested that any subsequent large acquisitions will be of businesses which are generating profits. This, along with the recent H1 results, points the way to a clearly-defined, wellarticulated strategy that is already being delivered at a rapid pace.
H1 results showed good stabilisation in the existing businesses, with the Media and App Distribution units generating rising profits with stable revenues. Costs are well-controlled, and the group generated cash at the operating level. Net cash at 30 June was $70.2m.
Acquisition of partner DriverAgent is a device driver search and update service which scans computers for outdated drivers on all Windows operating systems. Previously, it was successfully promoted on Crossrider’s proprietary app distribution platform, achieving a 125% increase in revenue from the product and doubling the gross profit.
Strategy clear and seems highly logical. The first phase, stabilisation and cost reduction, has already been delivered. The next phase, now under way, is likely to involve a number of bolt-on acquisitions, probably building on the group’s core skills of App distribution. Finally, there is the potential for a larger and more transformational deal, probably using a larger proportion of the cash reserves. Management comments suggest that such a deal is likely to take place only after some smaller deals have been successfully concluded and that it is very likely to be profitable. In our view, this combination dramatically reduces risk.
Valuation Crossrider had cash of U$70.2 million at the end of June 2016 and is debt free. Even after spending $1 million on DriverAgent, the result is a negative EV which implies that investors expect Crossrider to burn its cash on wasteful acquisitions and on supporting its existing businesses with no discernible positive growth resulting for the Group. We do not think that sits well with the points noted above.