RE:RE:RE:RE:RE:Q4 Earnings LB maintains $9.50 target
Mona Nazir, MBA • Industrials Analyst Arslan Benbakouche, M.Sc • Associate Tel: 514 350-2964• NazirM@lb-securities.ca Tel: 514-350-2808 • BenbakoucheA@lb-securities.ca March 9, 2018
IBI Q4/17 Results: 1x’s Cloud the Quarter, Thesis Remains Intact
Event
IBI Group Inc. (IBI) reported Q4/17 results yesterday after market close. A conference call will take place today at 8:30AM ET. The dial-in number for the call is 1-800-919-0370; replay 1-800-558-5253 (code: 21881905).
Impact
Slightly negative. Revenue and adj. EPS were in line while EBITDA came in below estimates.
Analysis
Our thoughts. Stripping out a number of 1x items in the quarter, as outlined below, IBI ended 2017 exactly in line with expectations from a revenue and EPS basis and EBITDA missed the mark by $1M (seasonally weak period). While 2018 guidance factors in 1.3% top line growth (vs. 2% growth in 2017), backlog represents 10 months of work (unchanged) and the crux of the story remains the valuation gap versus peers. As discussed in our preview the valuation gap vs. peers remains, 2x EBITDA and 1.5x+ P/E gap, and if we factor in a higher multiple for the intelligence/ technology practice (~13x EBITDA) then ~$1.50 upside to our target price exists. Catalysts for the story remain a potential dividend reinstatement and/or M&A (technology being the area of focus) in H2/18. With the quarter being clouded by a number of 1 time items and given the lower than expected EBITDA, we view any potential dips in the stock price as buying opportunities.
Adj. EBITDA below estimates, while margins see slight YoY expansion. Margin of 8.8% marginally increased YoY albeit came in below our / consensus forecast. The variance vs. our estimate was largely driven by higher salaries, fees, and employee expenses which could be linked to the recent ramp up in headcount. We note headline EPS was negatively impacted by one-time items (lease provision, rent, FV loss on derivatives and U.S. tax reform) which combined equated to $0.17. Excluding such, adj. EPS stood at $0.09 in line with our / Street estimates (lower D&A).
Revenue meets guidance. Revenue for the quarter came in at $87M, flat YoY and marginally ahead of our and consensus estimates. We note that FX had a $1.8M negative impact on revenue and excluding such, organic growth stood at 2.1%.
2018 revenue guidance factors in similar growth vs. last year. With quarterly results management provided new 2018 guidance of $366M in revenue (up 1.3% YoY), slightly below our “in line” estimate of ~$377M. The company currently has approximately $331M of work that is committed and under contract for the next three years representing ~10 months of work.
Leverage remains stable at 2.8x. At the end of the quarter, IBI’s net debt stood at ~$114M, relatively flat on a sequential basis. Net debt/ TTM EBITDA stood unchanged at ~2.8x, which remains well below the historical ~4x seen in the past few years. At current levels and considering the expected FCF generation in H1/18, we continue to believe management’s targeted leverage level of 2x to 2.5x in 2018 remains within reach.
We maintain our Buy rating and $9.50 TP, based on a 16x P/E multiple (2019E). On the call today, we look for: 1) greater clarity on the segmented top line performance; 2) outlook regarding margin for 2018; and 3) commentary on the bidding pipeline.