Turnaround quietly gaining traction
Blancco is the world’s leading developer of ‘data erasure’ software, used to protect governments and corporates from ID/data theft, ransomware and cyber-crime, along with being a pioneer in mobile device diagnostics. The business is roughly 7x larger than its closest competitor, and led by interim CEO/CFO Simon Herrick and Chairman Rob Woodward.After many challenges, this morning’s ‘in-line’ H1’18 results suggest that the worst is now over and we sense that management are becoming quietly more confident. A message further supported by interim CEO Simon Herrick saying the group is “better organised and controlled…in the best possible state to welcome a new CEO. â€
In terms of the numbers, H1’18 LFL turnover (incl. -£0.2m forex headwind, and stripping out the discontinued Mexican JV, £0.5m LY), adjusted EBIT, OCF and net debt came in at £12.6m (c. 95% recurring vs ED £12.5m, £12.8m LY), £0.8m (£0.5m ED, £2.5m), £0.9m (£0.5m ED, £0.8m LY) and £3.4m (-£4.0m ED, £1.7m LY) respectively. In turn generating 110% cash conversion, better than expected cost/cash control (eg lower headcount) and a 28% jump in mobile erasure (to £3.6m thanks to new client wins) - offset by several large multi-period deals recognised LY.
Looking ahead, H2 (turnover £15.9m) should benefit from the usual seasonal uplift in renewals on top of the 35 new channel partners signed (further boosted by Ingram Micro post period end), with cashflow being roughly neutral despite absorbing c. £750k of deferred consideration (£2.2m FY19). Consequently we reiterate our FY’18 estimates of adjusted EBITA of £2.9m on sales of £28.5m (+5.9%, margin 10.2%), rising to £4.3m and £32.7m (+14.6%, margin 13.2%) 12 months later, and net debt closing Jun’18 flat at £3.5m.
Likewise there is no change to our 114p/share valuation, but we note the significant upside possible if the new CEO can engineer a complete turn-around. Characterised by sustainable double digit top-line growth and 20%+ operating margins – metrics more typical of a leading, niche software developer, operating in the rapidly expanding cyber-security space. With regards to valuation at 65p, the stock trades at a material discount to the sector, especially with regards to CY EV/sales.
Blancco Technology Group provides data erasure software. Co.'s segments are: Erasure, which enables customers to erase and repurpose IT devices with certified software; and Diagnostics, which provides diagnostics of smartphones and tablets, as well as new diagnostics tools. The erasure division focuses on development and delivery of solutions, includes: Blancco, a provider of data erasure software; SafeIT, which involved in cloud and networked data erasure; and Tabernus, which provides software erasure products. The diagnostics division consists of the Mobile Diagnostics business, comprising Xcaliber Technologies, a smartphone diagnostics software business and its SmartChk solution.
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