Small Caps | Jul 09 2020
Damstra will acquire Vault Intelligence, expanding its product suite, customer and industry exposure and providing several avenues for growth.
-Vault expected to improve the value proposition
-Numerous cross-selling opportunities
-Major impetus to company products from the pandemic
By Eva Brocklehurst
Damstra Holdings ((DTC)), which independently verifies documentation for contracting companies, will expand its customer and product base with a significant acquisition, undertaking an all-scrip deal to acquire Vault Intelligence ((VLT)).
The two key Vault products are the Solo workforce monitoring software and Enterprise, a comprehensive solution for environment, health and safety risk management.
Solo can be cross-sold into the Damstra base and Shaw and Partners is particularly enthused about the remote product, which involves wearable and app-based employee tracking and productivity items, likely to be in demand with Damstra's blue-chip customers.
The broker withholds changes to estimates until the acquisition is completed, slated for October, yet expects Vault will improve the value proposition for mobile workforce clients and reiterates a Buy rating with a $1.80 target. There is also greater R&D scale on offer and more balanced customer and industry exposure.
Management reported revenue for FY20 of $20.9m and underlying operating earnings (EBITDA) of $4.3m. Guidance is for 30-40% organic growth in FY21. Morgan Stanley raises revenue estimates for FY21 to allow for the contribution from Vault plus the benefit of some organic growth, and Vault is expected to be cash flow positive in FY21.
The broker reduces the organic growth trajectory estimate for Damstra in FY22, expecting it will slow to under 20%, even though there are more levers at its disposal now, while acknowledging its estimates could be conservative.
While there is now a unique product proposition and compelling strategic rationale, Morgan Stanley suspects merging the businesses will be challenging, although maintains an Overweight rating and $1.80 target.
The broker discerns Damstra has bought two businesses in one and, given large parts of the legacy WFM solution will be retired, there is an opportunity to improve features and ultimately monetise the combined base.
Moelis believes the acquisition has a strong rationale as it builds the platform into a compelling and comprehensive offering and enables numerous cross-selling opportunities and retains a Buy rating with a $1.74 target.
Customers are also now more diverse and this establishes a stronger presence in Singapore and Hong Kong. The acquisition price is considered reasonable at $58.8m, given costs and revenue synergies.
This is also strongly accretive from FY22, given anticipated top-line revenue growth at Vault of 60-70%. Management at Damstra appears increasingly confident in the US opportunity and Moelis envisages a large multiple re-rating because of the size of that market.
Attention is expected to be on material opportunities going forward. Still, Morgan Stanley points out investors remain concerned about the pace of acquisitions, with Vault being the third since October. The broker would prefer organic expectations were met with new contracts and more internally-developed product as well as cross-selling.
While Vault can add materially to the growth and valuation potential, Shaw is also of the view that the core business is rich in catalysts and there are structural tailwinds, while the transition to online cloud-based solutions continues to strengthen. The broker expects the market cap of the combined business will be $250m and a cash balance of $12m is envisaged at acquisition.
The coronavirus pandemic is also considered a major positive impulse for the company and sales are expected to strengthen. Shaw believes monitoring, workforce and asset assessment are likely to be increasingly emphasised by employers in the post-pandemic world.
Health, safety and efficiency remain in focus too, and Damstra has market leading products in Australia that are being expanded globally. The company is leveraged to a consumption and recurring revenue model, with around 90% of revenue recurring and gross margins high at over 65%.
Damstra targets large customers and grows product usage through winning parts of its workforce or sites in a geography then extending to other areas of the group. The company counts Newmont, Glencore, AGL Energy ((AGL)) and Orica ((ORI)) among its customers.
Damstra was contained within the Skilled Group before being bought out in 2016 by the current management team, listing on ASX in 2019. Meanwhile, Vault has a range of products licensed to over 400 enterprises.
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