Regenersis (RGS) may not be a household name but the group provides electronics test, repair and aftercare services for big-name consumer device brands including Samsung, Orange and Apple. The rapidly increasing popularity of devices such as smart phones, tablets and digital television has previously driven growth for Regenersis. However, the group is now pursuing a new strategy focusing on higher-margin work, and recently disposed of its lower-margin arm servicing the UK mobile sector. The shares have derated heavily since November last year with the 12-month forecast earnings multiple halving to 10 times after the company spooked investors by reporting its first loss since 2011. However, we think the new focus will reinvigorate growth for Regenersis and cause the sharp derating to be short lived.
- Focusing on growth markets
- Low rating
- Diverse geographical exposure
- Net cash
- Adverse currency exposure
- Exposure to emerging markets
Regenersis is made up of two divisions - software and advanced solutions, and its depot solutions business. The advanced solutions division, which accounted for a fifth of first-half revenue and just over half profits, has become the group's core driver of growth, following some important software sector acquisitions during the 2014 financial year as well as client wins. After a £100m fundraising in April last year Regenersis acquired Finnish-based Blancco, which provides data erasure software to governments as well as blue-chip companies and suppliers to telecoms. Blancco is capitalising on growing demand for data erasure services in an environment where mobile devices and cloud data storage are becoming more pervasive.
The same year the group bought cloud data erasure business SafeIT Security Sweden and boosted its stake in Xcaliber Technologies, which provides smartphone diagnostics, to 49 per cent. As the data erasure sector is relatively immature, management believes it is ripe for consolidation and intends to build on its portfolio of software businesses. Its existing advanced solutions businesses are also making good progress. Notably, its set-top-box diagnostics business extended its contract with Liberty Global from 2016 to 2018.
Channelling greater investment into its software and advanced solutions business is already paying off. During the first half of this financial year divisional revenue grew 42 per cent and more than doubled on a constant-currency basis. Meanwhile, headline profit increased an impressive 89 per cent on a constant-currency basis to £4.5m.
Admittedly, sales for its depot solutions business have fallen recently as a result of the sale of its lower-margin UK mobile arm during the latter part of 2014. However, this looks like a sensible move, given pricing pressure in the UK had been weighing down the performance of depot solutions' western European and North American segment. Last year this knocked 300 basis points off the operating margin for this part of the business, which was down to 2 per cent. On the brighter side, during the first half of the year depot solutions had already replaced business lost as a result of the sale. Organic revenue growth for depot solutions was 18 per cent, or almost a third in constant-currency terms, compared with the second half of 2014.
REGENERSIS (RGS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 215p | MARKET VALUE: | £170m | |
| TOUCH: | 212-218p | 12-MONTH HIGH: | 349p | LOW: 181p |
| DIVIDEND YIELD: | 2.5% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 163p* | NET CASH: | £12.1m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 140 | 7.3 | 13.8 | 1.1 |
| 2013 | 180 | 8.8 | 16.8 | 2.5 |
| 2014 | 198 | 10.4 | 16.2 | 4.0 |
| 2015** | 211 | 15.9 | 18.1 | 5.0 |
| 2016** | 224 | 19.8 | 21.9 | 5.4 |
| % change | +6 | +25 | +21 | +8 |
Normal market size: 5,000 Matched bargain trading Beta: 0.76 *Includes intangible assets of £112m, or 142p a share **Equity Development forecasts, adjusted PTP and EPS forecasts | ||||
