Small Caps | Nov 12 2018
Rhipe Ltd has substantial leverage to the trends in cloud computing and brokers are increasingly confident after the company upgraded FY19 guidance.
-Growth to be driven increasingly by higher-margin public cloud product
-An opportunity for investors to gain exposure to Microsoft cloud
-Corporate appeal a significant factor in the stock
By Eva Brocklehurst
Rhipe Ltd ((RHP)) has made a strong start to FY19, resulting in brokers upgrading forecasts substantially. The company's fortunes have been driven by an acceleration in sales from cloud service provider (CSP) channels, Microsoft Office 365 and Azure.
The company has upgraded FY19 guidance by 10%, to an operating profit of $10.5-11.5m. Compared with the prior year, at the mid point, this represents 41% growth. Brokers assert the company has substantial leverage to trends in cloud computing as a structural shift is changing the way IT resources are being used globally.
Shaw and Partners notes the first quarter produced a strong result in typically the slowest quarter for the business, with revenue of $55m up 30% and gross profit up 22.5%. The business is on track for a positive operating cash flow in the first half for the first time and adoption across the Asia-Pacific region is strong and growth is accelerating. The broker maintains a Hold rating and $1.44 target
Morgans observes investment and subsequent growth in the cloud remains robust despite fears of a slowdown and, as Rhipe is very late in the process, Morgans expects capital expenditure to slow considerably before the company's trajectory slows. The Office 365 seat count was exceptionally strong, at 325,000 as of October 31, not far off the broker's forecasts for where it would be in December, which represents an acceleration in monthly additions.
The main upside risk, in the broker's opinion, relates to the potential to exceed guidance, should cost investment not be as significant or if revenue growth exceeds expectations. Morgans upgrades FY19 and FY20 forecasts by 17% and 14% respectively.
Public Cloud Drives Growth
Larger legacy contracts that were resigned at the end of FY18 eroded the gross margin over that year but Bell Potter points out this rebounded in the first quarter. Growth is expected to be driven increasingly by higher margin public cloud product.
Bell Potter considers the updated guidance range conservative and maintains a Buy rating with a $1.60 target. The broker's forecasts are driven by an incremental improvement in the solutions margin, growth expectations from Azure and resilience in the private cloud (SPLA) market.
Shaw and Partners continues to be surprised by the strength in public cloud. Net seat additions are running at over 16,500 a month. Annualised recurring revenue for Azure also accelerated strongly, to around 4x the average monthly growth rate of FY18 and this business is becoming increasingly material to the company.
The broker takes a conservative stance on operating leverage, as the company continues to invest in one-off partner arrangements. However, medium and longer term forecasts are raised, as the suspected cannibalisation of the private older cloud business is not apparent.
Shaw and Partners likes the recurring revenue model which continuously grows as each period is rolled forward and the operating leverage is demonstrated as the business scales are. The broker reiterates a Buy rating and $1.55 target.
Rhipe represents the purest play for cloud growth within the Asia-Pacific region, the broker asserts. In particular this is a way for investors to gain exposure to Microsoft, VMware, Symantec, IBM and Citrix as these are Rhipe vendors. The broker suggests investors that desire Microsoft cloud exposure should consider Rhipe as a proxy in markets of US$12.5bn in size. Continuing strength in profitability is expected as scale is reached in many of its key markets.
Takeover Potential
Brokers also consider corporate appeal a significant factor factor. Deutsche Bank has recently initiated coverage on the stock, with a Buy rating and $1.65 target and suggests the company has an attractive business model with strong potential for earnings growth amid corporate appeal.
Brokers also expect the share buyback, renewed until September 6, 2019, will continue to provide support to the share price. The company intends to spend a similar amount in FY19 as in the previous year.
Rhipe provides cloud-based subscription software-as-a-service licenses to IT service providers across the Asia-Pacific region. The company also provides consulting, marketing and support to a network of IT service providers in conjunction with their subscriptions. The company is one of just 11 licensing partners with Microsoft and the only one headquartered in the Asia-Pacific.
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