SAI Global: Result 2015
Recommendation
It's becoming clear why private equity hoped to acquire information services and compliance group SAI Global last year. Today's result showed that the company was underperforming and, with new management in charge, profitability is now improving.
In constant currency terms, 2015 revenue growth was flat while earnings before interest, tax, depreciation and amortisation (EBITDA) rose 13%. With the benefit of the lower Aussie dollar, the numbers were even better (see Table 1). The Compliance Services division – SAI's problem child in 2014 – staged an excellent recovery, with earnings rising 36%.
Year to 30 Jun | 2015 | 2014 | /(–) (%) |
---|---|---|---|
Revenue ($m) | 548 | 528 | 4 |
EBITDA ($m) | 126 | 107 | 18 |
NPAT ($m) | 56 | 45 | 24 |
EPS (c) | 26.3 | 21.4 | 23 |
DPS (c) | 16.5* | 15.5 | 6 |
Franking (%) | 71 | 70 | N/a |
* 9 cent final dividend, 80% franked, ex date 27 Aug | |||
Note: Figures are underlying results |
New chief executive Peter Mullins can't take all the credit for the improved performance. Some of the restructuring initiatives that boosted profitability in 2015 were already underway at the time of his November 2014 appointment. But many of his plans for the company – such as removing duplication between the divisions – make sense.
Walked away
Less positive is SAI's ongoing dispute with Standards Australia, which granted it a 15-year licence to publish and sell standards in 2003 (the licence will be up for renewal by 2018). Uncertainty over what the company might pay to renew it – or whether it might lose the licence entirely – explains why the private equity bidders walked away from takeover discussions.
Mullins seems keen to reduce SAI's dependence on the licence and flagged an 'inorganic growth strategy' in the results presentation. To the rest of us, that means 'acquisitions'.
Acquisition indigestion was partly responsible for SAI's previous problems, so there's a risk the company is heading down a similar track. You should also be aware of the licence risk; a higher than expected renewal fee or its complete loss would cause a share price slump.
This is partly reflected in the valuation multiples. The company trades on an enterprise value to EBITDA multiple of about 9 times, which seems low for a high margin business exposed to a growth industry.
We'll devote some analytical time to SAI's various issues following reporting season but our previous recommendation guide looks too conservative. We're lifting the respective buy and sell prices and may adjust them again in a future review. The stock is up slightly since SAI Global: Result 2013 and the recommendation is HOLD.
Disclosure: The author owns shares in SAI Global.