Small Caps | Apr 08 2021
Rhipe has ridden the acquisition wave, securing a cyber security service business to expand its position in cloud software
-Growing profile for Rhipe across Asia-Pacific
-Addresses concerns regarding reliance on Microsoft
-Cashed up for more M&A growth
By Eva Brocklehurst
The acquisition wave has caught up with Rhipe ((RHP)) as it expands and cements a position in cloud software. EMT Distribution, a cyber security services business, is expected to be immediately accretive, delivering $2m in operating profit in FY22.
The company has embarked on a broader strategy to diversify its cloud subscription offering and synergies are anticipated through cross-selling across the existing Rhipe footprint.
Ord Minnett observes Rhipe's business is garnering a higher profile across the Asia-Pacific region, having made a number of accretive acquisitions. Cyber security is increasingly significant for both large and small enterprises as numerous cyber attacks have recently demonstrated.
The EMT acquisition, therefore, becomes a winner, in Bell Potter's view, as it also diversifies the existing business away from Microsoft and leverages the growing cyber security market.
The consideration for EMT Distribution is $11m up front with a further $2m available as an earn-out over the next two years. Ord Minnett expects EMT will complement the Rhipe "SmartEncrypt" product.
There is another part of the EMT business in the Middle East which delivers $500,000 in operating earnings and Rhipe has indicated it may also acquire this after further due diligence.
EMT Distribution reported Australian and Asian sales of $19m and underlying operating earnings (EBITDA) of$1.9m over the past year. As a result, Ord Minnett increases revenue and operating profit forecasts for Rhipe in FY22 by 6%, retaining an Accumulate rating and $2.45 target.
Bell Potter believes the deal will address a number of concerns investors have had regarding Rhipe over the past twelve months such as margin compression and reliance on Microsoft, as well as a "lazy" balance sheet after the capital raising.
The main leverage has come through acquiring specialty businesses, a smart move Shaw and Partners observes, also welcoming the diversification away from Microsoft and greater cross-selling opportunities. The value to clients subsequently increases and margins become more sustainable over the longer term.
Now, with a balance sheet that is well-placed to pursue accretion outside of organic growth, the broker expects there will be more acquisitions to come.
Cashed Up
Post the EMT acquisition, Rhipe is expected to have more than $45m in cash at the end of FY21 with around $80m available further acquisitions. The broker considers the stock is underrated by the market, given the cash generating nature of the business.
Australasia remains the company's largest market, accounting for around 70% of total sales, and with the pandemic under control the region's economies are performing significantly better than previously expected. Following the EMT acquisition, Shaw upgrades estimates by 8% for FY22 and 7% for FY23 onwards, maintaining a Buy rating with a $3.04 target.
Moreover, the broker suggests Rhipe is the purest play in terms of cloud growth within Asia-Pacific and provides a way for investors to gain exposure to Microsoft, VMware, Symantec, IBM and Citrix as they are all vendors.
Rhipe has achieved scale in many of its markets and should, therefore, offer increasing levels of profitability, Shaw adds. Having a solution backed by intellectual property is expected to provide advantages and market share over other cloud wholesalers.
The business is also light on capital expenditure, specialising in online marketing/customer acquisition. Bell Potter, with a Buy rating and $2.50 target, agrees there is ample potential for further acquisitions to build out the vendor portfolio and expand earnings.
The broker assumes a gross margin of around 30% which compares with the first half licensing margin of 12.7%. The second half is expected to show accelerating sales growth which, combined with this latest acquisition, should lay the foundation for another strong year in FY22.
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