As indicated at the August pre-close trading update, the Board are wasting no time to turnaround the less profitable and/or loss making parts of the group. First on the list are those activities/territories that possess insufficient critical mass, deteriorating fundamentals and/or unattractive cash generation.
Consequently this morning the company announced it was exiting from its Contract Telecoms Infrastructure interests in Africa, Asia and Latin America (some of which is UK sourced) as well as Dubai, Kuala Lumpur and Qatar. What’s more, in line with the lower associated NFI (contributing c. £7m in FY18) GATC’s London and Bromley offices are to be consolidated into the London Cotton Centre site to trim central overheads. All affected staff and customers will be notified shortly.
We think today’s news makes perfect sense, since it not only provides a substantial working capital boost (c.£7m), but also reduces the effective tax rate from c.35% FY18 to c.25% thanks to the reduction in non-recoverable withholding tax. Which, on top of a better than expected July’18 closing net debt position of £41m (vs £46m before), means that £4m of positive cashflow is forecast to be generated in FY19 alone - despite absorbing £3m of one-off restructuring costs.
Elsewhere, we have reduced our FY19 NFI and adjusted PBT expectations by £7.5m to £72.1m and £1.7m to £10.9m respectively, but held diluted EPS broadly flat at 25.0p (vs 25.1p before). With our valuation nudging up slightly from 175p to 180p per share.
As regards the big picture: “Gattaca remains fully committed to [both] its Technology and International divisions, which offer the opportunity to achieve significant, sustainable and scalable profits”. Indeed a new sales hub has recently been opened in Atlanta (Georgia, US) alongside its fast growing Dallas office. In China too, the Board hopes to replicate this success, as management focus more on cash generative Engineering & IT permanent recruitment activities without now having to also chase legacy Telco business.
We look forward to hearing greater detail at the prelims on 8 th November, along with an update on the new CEO appointment. In the meantime, we note that the shares are attractively priced - trading on FY19 multiples of 6.9x EV/EBIT and 5.7x PE vs sector averages of 9.6x and 12.1x.