DX (Group) plc (LON:DX) has confirmed that the UK Competition and Market Authority’s (CMA) review in to the acquisition of The Legal Post (Scotland) Limited and First Post Limited is now closed and no further action will be taken. Zeus Capital today said: This follows the announcement on the 16th September that the Initial Enforcement Order, put in place on the announcement of the investigation (5th July), had been revoked. The announcement had been perceived as a precursor to today’s positive conclusion and DX had already resumed integration of the acquired assets. Confirmation that no further action will be taken draws a line under the process. Forecasts remain unchanged as the positive impact to FY17 and FY18 numbers had been factored into estimates at the time of the initial acquisition announcement in May and were not changed on the announcement of the CMA investigation. DX potentially offers deep value trading on sub 4x PER, on current year earnings, and yielding 13% with just c. £6m net debt forecast for FY17.
Strategic rationale for the acquisitions remains – Legal Post was a direct competitor to DX’s Exchange business in Scotland. Incorporating it into DX’s operations, in combination with First Post’s DSA offering, will derive cost synergies as duplication of routes and exchanges are eliminated. Management has stated that this will lead to £0.6m of cost savings increasing EBITDA to c. £1.2m that equates to an acquisition multiple of less than three times. Forecasts assume just £0.9m increase in FY17.
Improving visibility in FY17 – Reassuringly, FY16 (21st September) results were in line with consensus expectations and today’s announcement marks the first positive step in what could prove to be a pivotal year for DX as it rebuilds investor confidence. An announcement regarding the outcome of the tender process on HMPO contract is expected in the coming weeks and a positive outcome for DX would help underpin estimates across the forecast period. In addition, a positive renewal season in the Exchange business in the first four months of 2017 and developments on the proposed new hub would give greater confidence in estimates and highlight the valuation discrepancy in the share price.
Valuation – DX (Group) plc offers a prospective yield of c.13% on the 2.5p FY dividend in FY17, c.2x covered by earnings on a balance sheet with just 0.3x net debt to EBITDA. Whilst there remains earnings risk, the current PER of sub 4x appears to be discounting further significant disappointments. A positive announcement on the HMPO contract in the coming weeks would materially improve confidence in the earnings outlook.