Montech Holdings (MOQ) 4 December 2015 · 2016-03-18 · Company profile – Montech Holdings re-listed on the ASX in June 2015. Its strategy is to develop, build and acquire complementary

he information contained in this report is provided by PAC Partners to Wholesale Investors Only. PAC Partners is paid a fee by the ASX under the ASX Equity

Research Scheme for this research. The information contained in this report is to be read in conjunction with other important disclosures at the end of this report

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Company Profile and Initiation Report

Recommendation None provided on a profile report Risk Rating Speculative Current Share Price $0.04$0.036 Historical EV/EBITDA – MOQ est* 18.8x Historical EV/EBITDA – Peers 22.0x Market capitalisation $42$40m Liquidity – Daily Value $0.02m

* Historic EBITDA is a proforma figure includes estimate of current corporate costs

Growing with the switch to Cloud-linked solutions

Company profile – Montech Holdings re-listed on the ASX in June 2015. Its strategy is to develop, build and acquire complementary Cloud focussed technology businesses to capitalise on the emerging digital economy. Its experienced management has a track record of identifying, developing and realising benefits of new technology businesses. MOQdigital – is a cloud-centric services and solutions offering to clients. Focus is upon embedding applications, data, infrastructure and managed services into customer operations. This entity emerged from the May-2015 $16.8m cash & scrip acquisition of Technology Effect and Breeze – both Microsoft award winning partners. • Technology sales and professional services are currently

57% and 34% of revenue mix respectively. These project and transactional businesses can be sporadic sales generators. MOQ intends to grow the current 9% that is recurring managed services revenue organically and by acquisition – by expanding in big data & analytics, security services and internet of things; and developing internal IP.

• MOQdigital’s merged pro-forma revenue growth has been 11%pa FY12-FY15. Revenues are firmly based on strong customer retention and diversification – with top 5 industry sectors providing 60%, lead by education and financial services. Following a SepQ-DecQ15 consolidation of its mergers, revenue growth is expected to accelerate to see a single-digit rise in FY16 and higher in following years.

• Historic EV/EBITDAe of ~19x is in-line with its peers, with little change this year but could fall to below 15x next year. If acquisitions were secured at the aimed prices of 4 to 6x EBITDA, MOQ would become better value even sooner.

• Board and Management control 79% of shares enabling nimble action on expansions or acquisitions – ample ability to seek new equity for growth and still retain control.

Key risks – These include price deflation of software and hardware and services, rise in competition and loss of key customers and technology change bypassing MOQ’s service provision. Inability to convert merger synergies to growth, obtain funding, loss of key staff present extra risks.

Statutory earnings

Y/e ($m) FY14A FY15A FY16F

Revenue 0.006 3.5 31.3 Gross margin -0.2 -1.0 6.3 EBITDA -0.2 -1.0 2.0 NPAT -0.2 -17.3 N/A* * N/A Not estimated due to early stage post consolidation of acquisitions

Proforma of merged group history - and possible trend

Source: MOQ announcements & PAC Partners estimates

MOQ share price performance

Source: Iress

Key Points

• Cloud-linked technologies and services are estimated to grow 30% pa from $1.2 billion in 2013 to $4.6b by 2018 in Australia. This is driven by growth in numbers of users, applications, devices & data needs - as society goes digital

• MOQdigital integrates cloud-centric service solutions. MOQ recently acquired & merged two groups that consult with and integrate clients’ information software needs with cloud products/solutions on platforms like Microsoft Azure.

• In FY16 we expect single-digit organic revenues growth, with revenues & EBITDA to accelerate in FY17. Bolt-on acquisitions can broaden coverage and growth prospects, driven by MOQ’s team, experienced at enhancing returns.

Montech Holdings (MOQ) Nimble group to capitalise on the Cloud technologies’ growth

4 December 2015

Lawrence Grech [email protected]

+ 61 3 8633 9831

PAC Partners | Equity Research Montech Holdings (MOQ)

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Capital structure and Ownership

Capital structure – may need consolidation

Few options to dilute but large number of shares

MOQ’s newly merged group sees a large number of shares on issue approaching 1.08 billion shares. The shares may be later consolidated but likely after its part of its promise of growth translates into corporate performance. The 25.0 million in-the-money options pleasingly present little dilution.

Source: MOQ Annual and SepQ’15 Reports

A DecH16 consolidation – revenues & cash flow poised to rise

SepQ15 saw negative cash flow as MOQ boosted capabilities

The SepQ15 has been a period of consolidation of the three-way merger of MOQ, Technology Effect and Breeze. This has resulted in the cash position declining $0.9m as MOQ’s revenue growth slowed and it spent extra on business re-orientation, staffing-up, marketing and capital items.

First signs of new customer wins Remainder of FY16 likely to see organic revenue growth

At the November AGM, MOQ’s Chairman stated he was “confident that the investment that [MOQ] had made in quality people will soon result in success with new customers wins.” Further, the CEO stated that the new business combination and technical capability had seen a positive customer response and MOQ was starting to win new business in each state in MOQ’s application integration and optimised platforms new practice areas. For 2016, confidence was expressed that current strategic investment would set up MOQ for future growth, however sales levels were not quantified. Our assessment is that the JunH16 will see organic revenue growth starting to gain traction with rising revenues from home Sydney and Brisbane markets, product cross-selling and shared services cost savings. These will generate cash flows for organic expansion geographically and in in-house product development. However overall EBITDA growth is likely to lag revenue in FY16 as MOQ invests in systems and people costs ahead of an acceleration in revenues in FY17 and beyond.

Ownership – Directors and Management control

Directors and Management control 79% of shares on issue, plus entitled to extra options. Substantial shareholders and other key shareholders include Shareholder No. Shares % Holding Comment Monash Private Capital Pty Ltd 182,283,334 16.93% Board – Non-executive Scott McPherson 176,559,780 16.39% Board– Executive Kathy L. Edwards (D’Addio) 176,559,780 16.39% Board– Executive Nicola Page & Michael Badran 141,666,667 13.15% Board– Executive Matthew Goggin & R.J. Goggin 88,279,890 8.20% Executive

David Shein 40,833,334 3.79% Board – Non-executive Michael Pollak 19,800,000 1.84% Board – Non-executive Jonathan Pager 7,450,000 0.69% Board – Non-executive


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Board Management and Business Plan

Board and key management

Board has deep IT business development & investing experience with complimentary skills David Shein Non-Exec Chairman

Mr Shein established Com Tech Communications and built its revenues to $700m, 1,400 employees and was sold in 2001 to Dimension Data. He was also Chairman & founding investor of Macromatix that was subsequently acquired by TPG Ventures in 2012. David invests in and mentors early stage technology companies though a business development to harvesting value benefits to owners.

Nicki Page Exec Director / CEO

Ms Page has over 20 years experience in Information Technology in both UK and Australia as a Computer Scientist. This is complemented by technical and sales roles with companies such as KAZ Computing and Microsoft. CEO of Breeze and post-MOQ’s acquisition and has been appointed CEO and an executive director. She was named 2014 ARN Women in ICT Entrepreneur of the year.

Joe D’Addio Exec Director / COO

Mr D’Addio has over 35 years in IT professional services, technology consulting, system and network engineering. He has held key management & director positions to build and lead IT businesses with Com Tech Communications, Dimension Data and co-founded Technology Effect. Following the merger with MOQ he becomes its Chief Operating Officer.

Scott McPherson Exec Director / Director Solutions

Mr McPherson has over 20 years experience at Com Tech Communications and Dimension Data. Starting as a systems engineer, he transitioned to solutions architecture and to practice management. He co-founded Technology Effect and has been appointed Director Solutions and to the MOQ Board.

Non-executive directors Mr Joseph Fridman - investment banking and executive financial management expertise and is co-founder of Monash Private Capital Pty Ltd. Mr Jonathan Pager – is an adviser across a wide range of industries in Australia and overseas and is currently Managing Director of Pager Partners Business Consultants; Mr Michael Pollak - is a chartered accountant and has an MBA in strategy and has experience in management, audit, insolvency, corporate advisory and strategy across a wide range of industries.

Other key management Matt Goggin Director Sales

Mr Goggin has over 20 years experience in IT industry sales and building customer focused teams. He was previously at Com Tech Communications, Dimension Data and Technology Effect

Mick Badran Chief Technical Officer

Mr Badran – over 20 years experience, mastermind behind projects that have achieved global recognition and renowned for ability to architect innovative integration solutions. Co-founded Breeze • Awarded as a Microsoft Most Valuable Professional (MVP) every year since 2005

Business plan – is to transition along “Cloud Services Value Chain”

Pre-merger business segment focus

Technol Effect & Breeze Mid-margin

Technol Effect & Breeze Mid-margin

Technology Effect Higher potential margin

Breeze Higher potential margin

New focus to is optimise Transactional & Project based services

and … invest & grow Managed Services & Commercialised IP

This boosts recurring revenue streams and ultimately margins

Montech Holdings Limited, October 20159 www.MOQ.com.au

FOCUS ON BUILDING RECURRING REVENUE

Transitioning along the ‘Cloud Services Value Chain’

9MOQdigital is transitioning from consulting projects and technology sales to higher value recurring revenue

9Focus on integrating ongoing managed services into a full service offer and developing commercialised products and applications to be reused and resold

9Focus on recurring revenue is evident in tenders and contracts won since year end

Managed Services is a highly scalable business – as sales increase margins expand

MOQdigital provides clients services along the full Cloud services value chain. This exposure assists growing its client base. However it seeks to transition emphasis from sporadic consulting projects and technology sales to higher value recurring revenue business streams. This is to be achieved by:

• ︎ Focus on integrating ongoing managed services into a full service offer • Developing commercialised IP – products and applications to be reused and resold

The focus on recurring revenue is evident in contracts won since June-2015. The revenue benefit will start to be booked in the latter part of FY16. Additionally execution of the organic growth involves:

For now synergies, cross-selling and office expansion provide ample organic revenue growth

• Continued growth Sydney and Brisbane home markets • Driving synergies from merged and shared services and cross-selling products • Develop in-house products, commercialise/enhance Cloud Data and build to client demand • Expand geographically in Australia and NZ with support of technology vendor partnerships


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Products and industry exposure

Platform and product offering

Montech acquired and merged these two multi-awarded cloud focussed software and services businesses. The MOQdigital platform was created to provide synergies of further integration of cloud solutions to customers, cross-selling, shared services and new products development efficiencies.


MONTECH ACQUIRED AND MERGED TWO SYNERGISIC BUSINESSES TO FORM MOQDIGITAL

Technology EffectConsulting, integration and managed services solutions in ICT infrastructure and CloudBreezeCloud application integration solutions based on Microsoft technologies

Supports mid-market enterprises and government to shift their infrastructure and

applications to private and hybrid cloud models …this process has only just begun

Strong reputation with a range of tier one technologies and solutions

Two multi-awarded cloud focussed software and services businesses

Technology Effect Consulting, integration and managed services solutions in ICT infrastructure and Cloud

Breeze Cloud application integration solutions based on Microsoft technologies

Technology partners & platforms MOQdigital’s –Integrated Cloud Centric Service


MONTECH ACQUIRED AND MERGED TWO SYNERGISIC BUSINESSES TO FORM MOQDIGITAL

Technology EffectConsulting, integration and managed services solutions in ICT infrastructure and CloudBreezeCloud application integration solutions based on Microsoft technologies

Supports mid-market enterprises and government to shift their infrastructure and

applications to private and hybrid cloud models …this process has only just begun

Strong reputation with a range of tier one technologies and solutions

Two multi-awarded cloud focussed software and services businesses

Information and communications technology (ICT) hardware, networking and software sales Enables MOQ’s customers to transform into digital businesses

Source: MOQ Oct-15 presentation


MOQDIGITAL – AN INTEGRATED CLOUD CENTRIC SERVICE OFFERING

We set the strategy, develop innovative solutions, bring integration skills to the most complex environments and provide managed services for ongoing support

… so our customers can transform into truly digital businesses

Information and communications technology (ICT) hardware, networking and software sales

Product development opportunities

Key customer and industry exposure

MOQ’s key market focus supports mid-market enterprises and government to shift their infrastructure and applications to private and hybrid cloud models

Diversified industry exposure Boosts resiliency of revenue base Education, financial services and utilities make up 47% of revenue Source: MOQ Oct-15 presentation


25.5%

12.0%

6.8% 7.9% 8.1% 7.1% 5.6% 6.3% 5.0% 4.9% 3.5% 3.5% 2.9%0.7% 0.4%

LOYAL CUSTOMER BASE WITH HIGH RETENTION AND BROAD SPREAD

Revenue by sector

Various business segments have client retention rates above 90% Source: MOQ Oct-15 presentation

MOQ’s combined customer base has broad industry spectrum and high retention rates


25.5%

12.0%

6.8% 7.9% 8.1% 7.1% 5.6% 6.3% 5.0% 4.9% 3.5% 3.5% 2.9%0.7% 0.4%

LOYAL CUSTOMER BASE WITH HIGH RETENTION AND BROAD SPREAD

Revenue by sector


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Growth prospects, valuation and investment catalysts

Expect re-invigorated growth in 2016 to 2017 – and improved valuation

Track record required before company guidance to be issued Revenues consolidating in DecH15

We expect modest growth in JunH16 to then accelerate in FY17 Its still early to define trends in operating business margins

Corporate and overhead costs need confirmation in DecH15 accounts

We await more data to issue a stock recommendation EV/EBITDA valuation improves markedly if revenue growth translates into EBITDA expansion

This looks more likely to occur in the FY17 year than this year Acquisitions could fast track improved valuation

MOQ has not as yet provided the market detailed forecasts of revenue growth and earnings as it consolidates its new business combination. The trajectory of revenue and earnings growth will require progressive quarters of results to establish firm trends of the newly merged group. However after the DecH15 consolidation period – it is our belief that contract and tender wins can boost revenue growth to single-digit percentage growth rates for FY16 as a whole. If its organic growth strategy succeeds, FY17 revenue growth should accelerate, with around 20% possible.

Earnings margin trend – uncertain but rising into FY17 is likely Assuming gross margins and EBITDA margins fall slightly in FY16 on investing for expansion costs; and rise modestly in FY17 – MOQdigital’s EBITDA pro-forma level of $2.5m achieved in FY15 could be flat in FY16 and rise over 20% in FY17 respectively. Note these are our estimate of MOQdigital, the operating arm of MOQ. These exclude its corporate and listing overhead costs that may amount to $0.4 to $0.5m pa. We use the higher figure, though these costs require confirmation in the DecH15 accounts. Our aim is to reflect an indicative operating earnings trend should business plans secure the necessary client and revenue growth. We have withheld a stock recommendation due to the difficulty in forecasting earnings and margins at this early stage. In part this is due to the likely change in business mix from sporadic but solid margin equipment sales and consultation, towards Managed Services’ more recurring incomes. The latter’s business stream has good margins at low revenues levels but unit profitability significantly expands as total sales scale-up. Currently we do not expect operating margin expansion until FY17.

Valuation – comparable to peers; can become more attractive if growth succeeds The current valuation as expressed by EV/EBITDA based on FY15 is about 18.8x assuming inclusion of our estimate of $0.5m corporate cost. This appears high absolute number, but is comparable with its peer companies’ valuation. Data provided from S&P Capital IQ (see appendix) sees capitalisation weighted EV/EBITDA on FY15 earnings at around 22x; though more than half our sample had EV/EBITDA’s less than 20x. The early business roll-out uncertainties of the merged MOQ do not suggest undervaluation at our estimate of MOQ’s current EBITDA multiple. Assuming the success of management in generating growth – the valuation as expressed by EV/EBITDA would start to improve with a lag. Our initial FY16 earnings estimate sees a flat EV/EBITDA at 18.8x, while a FY17 earnings rise sees a pleasing fall in EV/EBITDA to around 14.5x. Acquisitions of $5 to $10m in size are aimed at the 4x o 6x EV/EBITDA multiples valuation. If secured and once they are merged, this adds $0.5 to 1.0m EBITDA or over 20% to MOQ earnings. The lower acquisition multiple could reduce overall EV/EBITDA subject to method of financing any purchase.

What can success in the strategy look like - moving into FY17?

Post-merger rise in revenue and later earnings is expected This sees EV/EBITDA margins markedly improve in FY17

Post-merger revenue growth expected to accelerate Can EBITDA margins markedly improve as well in FY17?

Source: MOQ prospectus, results & presentations and PAC Partners estimates

Investment catalysts

• MarQ16 - Revenue and net cash flow DecQ15 report showing early evidence of growth • JunH16 - Evidence that revenue and net cash flows show an accelerating trend • FY16-17 - Notable single customer tender wins, product enhancements or new product roll-out • FY16-17 – Expansions across Australia and New Zealand are initiated with revenue additions • FY16-17 - Acquisitions at cheap EV/EBITDA multiples particularly if added synergies are likely


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Appendix - 1 Industry peers EV/EBITDA and forward PE

Source: S&P Capital IQ Database 16 Nov 2015

Appendix - 2 Local Cloud-business opportunity growing fast – global scope is vast


CLOUD – A BIG OPPORTUNITY AS USERS, DEVICES, APPS AND DATA MULTIPLY

us$108bnBy 20171

Global Demand

By 2018

(from 1.23bn in 2013, +30% CAGR)2

AUD$4.55bn

Expected to quadruple

over five years to

• Increased flexibility and agility

• Scalability of technology

• Cost efficiencies as businesses shift from Capex to Opex models

Key adoption drivers

Sources: IDC, Successful Cloud Partners 2.0, 2014; Frost & Sullivan, as reported in Rust Report of 27 October 2014

• Increase in speed and quality of service

• Meets the need for keeping up with customer demands

• An unprecedented amount of data is being created and businesses need to store, manage and harness this

Sources: IDC, Successful Cloud Partners 2.0, 2014; Frost & Sullivan, as reported in Rust Report of 27Oct14


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Contact Information

Head Office: Level 12, 15 William St Melbourne VIC 3000 Australia. Tel: +61 3 8633 9831

PAC Partners – Executive Team PhillipCapital – Institutional Sales Team

CRAIG STRANGER Managing Director +613 8633 9832 [email protected]

SEAN KENNEDY Corporate Finance +613 8633 9836 [email protected]

Anthony Stani Corporate Finance +613 8633 8251 [email protected]

BROOKE PICKEN Equity Capital Markets +613 8633 9831 [email protected]

JAMES WILSON Head of Institutional Dealing +61 2 9233 9607 [email protected]

PAUL JENSZ Director, Senior Industrial Analyst +613 8633 9864 [email protected]

ANDREW SHEARER Senior Analyst +613 8633 9862 [email protected]

Roger Chen Junior Analyst +613 8633 9868 [email protected]

Lawrence Grech Senior Analyst +61 (0) 404 052 913 [email protected]

MARK PASHLEY Head of Trading +61 2 9233 9641 [email protected]

BRENDAN FOGARTY Corporate Sales +613 8633 9866 [email protected]

TOM FAIRCHILD Corporate Sales +613 8633 9867 [email protected]

EDWIN BULESCO Corporate Sales - Perth +61 (0)431 567 550 [email protected]

RICHARD CLOSE Institutional Dealing +61 3 8633 9883 [email protected]

Recommendation Criteria

Investment View PAC Partners Investment View is based on an absolute 1-year total return equal to capital appreciation plus yield.

Buy Hold Sell

>20% 20% – 5% <5%

A Speculative recommendation is when a company has limited experience from which to derive a fundamental investment view.

Risk Rating PAC Partners has a four tier Risk Rating System consisting of: Very High, High, Medium and Low. The Risk Rating is a subjective rating based on: Management Track Record, Forecasting Risk, Industry Risk and Financial Risk including cash flow analysis.

Disclosure of Economic Interests The views expressed in this research report accurately reflect the personal views of about the subject issuer and its securities. No part of the analyst's compensation was, is or will be directly or indirectly related to any recommendation or view expressed in this report. The following person(s) do not hold an economic interest in the securities covered in this report or other securities issued by the subject issuer which may influence this report: • the author of this report • a member of the immediate family of the author of this report Disclaimer PAC Partners Pty Ltd. (“PAC Partners” or “PAC”) is a Corporate Authorised Representative of PAC Asset Management Pty Ltd holder of an Australian Financial Services Licence (AFSL No. 335 374). PAC Partners is a business partner of Phillip Capital Limited (“PhillipCapital”) (AFSL 246 827). The information contained in this report is provided by PAC Partners to Wholesale Investors only. Retail investor and third party recipients should not rely, directly or indirectly, on this report. Users of this research report should not act on any content or recommendation without first seeking professional advice. Whilst the report has been prepared with all reasonable care from sources which we believe are reliable, no responsibility or liability is accepted by PAC Partners, for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflect our judgement and assumptions at the date of publication or broadcast and may change without notice. This report is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This publication contains general securities advice. In preparing our Content it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual user. Access of this report does not create a client relationship between PAC Partners and the user. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. PAC and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. PAC believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by PAC or any of its directors, employees or agents. Any content is not for public circulation or reproduction, whether in whole or in part and is not to be disclosed to any person other than the intended user, without the prior written consent of PAC Partners. Disclosure of Corporate Involvement This report was prepared solely by PAC Partners Pty Ltd. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by PAC Partners Pty Ltd, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports. PAC Partners has in the previous 12 months carried out work on behalf of the Company described in this report and received fees on commercial terms for its services. PAC Partners and/or their associates may own securities of the Company described in this report. PAC Partners does and seeks to do business with companies covered in the research. PAC may receive commissions from dealing in securities. As a result, investors should be aware that PAC Partners may have a conflict of interest that could affect the objectivity of this report.

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Montech Holdings (MOQ) 4 December 2015 · 2016-03-18 · Company profile – Montech Holdings re-listed on the ASX in June 2015. Its strategy is to develop, build and acquire complementary