Empired Stake Building A Big Attraction

By James Dunn | More Articles by James Dunn

Empired has delivered strong returns to shareholders, up 36% a year in total returns in the past five years, and 35% a year over the past three years. After a dip to 52 cents in May this year, the shares have recovered strongly.

Perth-based IT services provider Empired Limited (EPD) positioned itself for a big year in FY14, with some significant announcements in late 2013.

First, in August 2013, Empired partnered with fellow IT house Oakton to land a multi-million dollar services contract with gold miner Barrick Gold Corporation to supply a fully managed Oracle service for Barrick’s core financial accounting system, including real-time replication, in the Asia-Pacific region. Empired provides the infrastructure and managed services through its cloud computing platform, FlexScale.

Then, on the same day in September 2013, Empired announced a $15 million acquisition of east coast Microsoft specialist OBS; a $15.5 million equity capital raising to pay for it; and a three-year, $50 million contract – which it termed a “game-changer” – with a still un-named mining company to design and implement core operational mining systems to replace the miner’s legacy technologies.

OBS brought with it $32 million of annualised revenue in high-growth services across the east coast of Australia, establishing Empired as the largest Microsoft SharePoint partner in Australia.

Empired followed these successes in October 2013 by winning a hotly contested $46 million tender for infrastructure support services from Main Roads Western Australia (MRWA), managing the-fibre optic network behind WA’s street lights for a period of up to five years, as well as two data centres housing more than 750 servers and more than 2,200 workplace devices.

The contract wins were perfect examples of the kind of higher-margin, multi-year, multi-million dollar managed services work that Empired had set itself to land.

Empired has kept the expansion coming this year. In May, it bought Sydney-based IT consultancy eSavvy for $2.2 million. eSavvy is a Microsoft Dynamics CRM partner specialising in enterprise-level CRM (customer relationship management) projects: the acquisition doubled the size of Empired’s Sydney office and cemented the company as the largest Microsoft CRM partner in Australia, to complement its dominance of the Microsoft SharePoint market.

The OBS and eSavvy acquisitions have made Empired a national company, with a presence in all Australian states, and tapped into the rapidly growing eastern seaboard IT services market. The company offers a suite of high-demand services in the areas of cloud computing, “big data,” business analytics, mobile, social and security – with a client list of companies and government departments that matches its geographic spread.

After all of this activity the market was expecting a strong result for the year ended 30 June 2014, and Empired delivered in spades – financially, strategically and operationally.

Earnings before interest, taxation, depreciation and amortisation (EBITDA) grew 98% to $7.1 million, and net profit after tax surged by 145% to $3.8 million. Revenue rose by 44% to a record $67 million, with services revenue representing 85% of this result.

Earnings per share (EPS) jumped by 95% to 4.26 cents, which enabled Empired to pay a fully franked dividend of 1 cent a share, up from 0.5 cents in FY13.

Net operating cash flow was strong with $5.3 million of positive net operating cash flow for the year – 93% of which flowed through from EBITDA. The balance sheet is also in a sound position to fund growth, with net debt of $5.2 million at June 30, and cash of $8 million.

The $15 million of equity capital raised through an institutional placement in September 2013 has been topped up by a further $10.5 million capital raising last month, leaving Empired in a strong position to fund future acquisitions.

Empired listed in October 2007, raising $3 million through the issue of 10 million shares, or 22% of the company at 30 cents. At listing Empired was capitalised at $46.2 million: it has increased that to $69.7 million, while the shares have risen in price to 73 cents.

Empired has delivered strong returns to shareholders, up 36% a year in total returns in the past five years, and 35% a year over the past three years. After a dip to 52 cents in May this year, the shares have recovered strongly.

Application services deliver just over half of the company’s revenue, and have grown the fastest in the last year, being driven by the acquisitions of OBS and eSavvy. That’s good, because it is the highest-margin line of Empired’s business, and is typically “stickier” revenue. The company’s strategy is to grow the contracted revenue base through managed services.

The infrastructure services business generates 36% of revenue, with about 90% of this revenue coming from multi-year contracts. Growth in FY15 will be under-pinned by the Main Roads contract and a healthy new business pipeline.

Energy and natural resources delivers 30% of Empired’s revenue, and the government sector 29%, but it is fairly well diversified across a range of sectors. The east-coast expansion gives it the ability to attract new state government work, and also there is the scope to increase further its work in the Sydney- and Melbourne-based finance sector, which presently (FY14) contributes 11% of revenue. The company says it will contest more than $90 million worth of major contracts over the next 12 months.

Over the past five years, Empired says it has grown its revenue by a compound annual rate of 25% a year, and its EBITDA by a compound annual rate of an impressive 90% a year. They are big numbers, but Empired is aiming at further growth in a $17 billion-plus Australian market. The cloud market alone is expected to grow from $470 million in 2010 to $2 billion by 2015.

Clearly, the relationship with Microsoft is critical to the investment case. But Empired is the biggest provider in this country of two of Microsoft’s major products, so it could be expected to continue to look favourably on Empired. There are not many analysts that follow Empired – yet – but those that do have a consensus price target on the stock of 85 cents, and they see it more than tripling its earnings in FY15. Empired looks to have all the attributes of a company that is moving rapidly up the market capitalisation ladder.

James Dunn

About James Dunn

James Dunn was founding editor of Shares magazine and has also written for Business Review Weekly, Personal Investor, The Age and Management Today. He was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au.

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