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Cost of growth

To us, there are three standout features within Xpediator’s interim results: significant investment for growth, revenues broadly in-line with previous expectations and short-term difficulties across a few of the business areas.
Sales of £102.4m are in-line with prior expectations, given the H2 trading bias. However, whether facilities are filling capacity slower than initially expected, or due to temporary disruptions, margins were squeezed in some instances. The investment in management and IT has markedly increased the cost profile of the business, albeit it has cemented the foundation for future growth.
It has been an eventful year to date. Management has looked to invest in the infrastructure of the business, to facilitate future growth and remove potential bottlenecks. While this approach is likely to pay dividends over the longer term, there have been short term cost implications. Also, disturbances within some businesses during H1, due to either temporary closures/disruptions or capacity filling at a slower than expected pace, had a knock-on effect on margins and adj. PBT/EPS. As a result, we have reduced our dividend estimate, with the new expectation covered 3.4x and equating to a forward yield of 3.5%.
Despite the disruption to some of the Group’s operations, revenues are trending in-line with prior estimates. This is encouraging. That said, in the face of Brexit and the higher than anticipated cost base, we have reduced estimates for adj. PBT/EPS further. Management has guided on the adj. PBT outcome for FY2019F of £5.0m and because of the H1 result; a traditional H2 bias to sales, and temporary disruptions cleared, we believe this to be very achievable. Looking further forward, we prefer to take a very conservative stance and suggest 5% top-line growth into FY2020F and broadly static margins. We have assumed that dividend growth is likely to be progressive from here.

We have built several valuation models for Xpediator, of which the peer group comparison is the most bullish. The average when including a three-stage dividend discount model and a DCF amounts to a fair value of 53p / share. In addition, one should bear in mind that net cash amounts to 12.4% of the current market capitalisation, rising to 15.5% by the end of FY2020 on our forecasts.