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DX (Group) Plc

DX (Group) PLC Successful HMPO tender improves forecast certainty – Zeus Capital

DX (Group) PLC (LON:DX) has confirmed that it has won the retendering of the HMPO contract. We understand that it was a highly competitive process so retaining the contract is especially pleasing and provides greater confidence looking forward. We leave forecasts unchanged but with materially increased certainty on being achieved. The successful retender highlights that the quality of service DX has delivered over the previous contract periods has been respected. The only disappointment in today’s statement is the announcement that the decision on the resubmission of planning permission for the central hub has been delayed until mid-February. Today’s announcement de-risks FY17 and FY18 earnings and net debt forecasts and highlights the attractiveness of the prospective 2.5p dividend in each year. We leave forecasts unchanged meaning DX is trading on just 3.6x FY17 earnings and yielding c.14% on last night’s 17.75p closing price. A conservative 7x short term recovery multiple would equate to a 35p share price offering 97% upside, this would still only equate to 4.0x EV/EBITDA.

* Passport contract importance greater than its size – In annual Group revenue terms the contract is worth a relatively small c. £20m – £25m but we believe the volume it provides for the important Secure division underpin the better economics of this area relative to other areas of the business. The Secure business grew at c.9.0% last year and should continue to grow strongly on the strength of its service offering and retaining HMPO volumes will underpin its economics. We understand it was a very competitive process and to win it shows the strength of DX’s Secure offering. The only material change would appear to be the movement in length from 3+1 year contract term to a 2+2 year.

* Improved visibility in FY17 – Whilst we don’t ignore the intense competition in all areas of the deliveries market, the HMPO tender win materially increases the certainty of achieving FY17 PBT estimate of £12.2m. In turn, this would increase certainty on our assumptions of net debt falling to just c.0.3x EBITDA. With this low level of gearing it increases the attractiveness of the 2.5p dividend which equates to a 14% yield and is twice covered by earnings. Further confidence across the forecast period will be taken should Exchange experience a benign renewals season in January, albeit with the April renewal period still to come before the period end.

* Valuation – Placing a recovery multiple of 7x on FY17 earnings would equate to a DX (Group) PLC share price of 35p, offering c.97% upside. Arguably, this multiple is supported by the greater certainty today’s announcement provides to earnings. The shares have recently gone ex-dividend 1.5p (10th Nov) leading to a 1.75p fall to 17.75p. At this level the prospective yield of c.14.0% is appealing on a balance sheet with little debt as net debt declines to just 0.3x EBITDA.