Northland Capital partners view on Octagonal PLC “A good set of interim results”

Northland Capital partners view on Octagonal PLC  A good set of interim results given the considerable management distraction of the reverse takeover and the associated placing. Octagonal provides global settlement and safe custody services to investors, principally smaller institutions, family offices and high net worth individuals. It is growing, profitable and cash generative. As transactional volumes grow, operational gearing means the bulk of gross profit drops to the bottom line and also translates into cash. Octagonal differentiates itself through the strong relationships it has developed with its customers and service providers and a fixed fee per transaction model. Octagonal has the platform and necessary permissions to offer additional services and drive incremental revenue streams. The cash generative nature of the business will also support a healthy dividend stream. For the purpose of our forecasts and valuation, we have excluded the dividend at this stage. In spite of this, we believe the current share price fails to reflect where the company is now and where it can grow to. We maintain our forecasts, BUY rating and 2.8p price target.

Interims: Good H1 performance, outlook positive
n  Good H1 trading following the reverse takeover of Global Information Systems (GIS) through the acquisition of the outstanding 90% in June 2015. On a pro forma basis, H1 revenue increased 25% to £1.9m reflecting a 34.5% increase in aggregate trade volumes to more than 47,800 that partly reflected an expansion of its base of clients and counterparty banks. June represented a record month with more than 12,000 transactions and July was 66% ahead of July 2014.

n  Gross margin declined slightly to 62% (H1 FY15: 63%) but adj. pro forma operating profit doubled to £0.4m – operating margin increased to 36% (H1 FY15:24%), reflecting the effects of operational gearing. On a reported basis, PBT was £0.1m compared to a loss of £1.1m (pre-acquisition). There were exceptional costs of £0.5m associated with the reverse. Management has identified a number of initiatives aimed at reducing costs further and drive additional revenues through ancillary services.

n  The new Altimis cloud based settlement and client reporting IT system will go live shortly that should enable cost savings as well as a providing a platform for further growth.

n  £1.7m raised via a placing of 85m shares at 2p/share that was used partly to fund the acquisition and for working capital of the enlarged business. Cash at bank was £1.3m. Management reiterated its goal of paying 50% of free cash flow in dividend, once sufficient distributable reserves are available.

n  Management reports that GIS continues to trade in line with market expectations. This is based on organic growth but the company will continue to look at acquisitions. FY forecasts, BUY rating and 2.8p price target price target maintained.

Year end Mar Revs (£m) Adj. EBITDA (£m) Adj. PBT (£m) Tax (%) Adj. EPS (p) PER (x) Div (p) Net cash (£m) Yield (%)
2014A† 2.6 0.7 0.7 0.0 N/A 0.2
2015A† 3.3 0.5 0.5 4.9 0.09 0.3
2016E 4.1 1.0 1.0 15.0 0.15 6.1 1.9
2017E 4.8 1.3 1.3 16.0 0.20 4.5 2.8

Source: Northland Capital Partners Limited. † pro forma. * Northland Capital Partners acts as Broker to Octagonal.

 

 
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