##{"id":92827,"date":"2021-04-08T11:55:55","date_gmt":"2021-04-08T01:55:55","guid":{"rendered":"https:\/\/www.fnarena.com\/?p=92827"},"modified":"2021-04-08T11:55:57","modified_gmt":"2021-04-08T01:55:57","slug":"cyber-security-a-growth-channel-for-rhipe","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2021\/04\/08\/cyber-security-a-growth-channel-for-rhipe\/","title":{"rendered":"Cyber Security A Growth Channel For Rhipe"},"content":{"rendered":"

Rhipe has ridden the acquisition wave, securing a cyber security service business to expand its position in cloud software<\/p>\n

-Growing profile for Rhipe across Asia-Pacific
-Addresses concerns regarding reliance on Microsoft
-Cashed up for more M&A growth<\/strong>
<\/p>\n

By Eva Brocklehurst<\/p>\n

The acquisition wave has caught up with Rhipe ((RHP)) as it expands and cements a position in cloud software. EMT Distribution, a cyber security services business, is expected to be immediately accretive, delivering $2m in operating profit in FY22.<\/p>\n

The company has embarked on a broader strategy to diversify its cloud subscription offering and synergies are anticipated through cross-selling across the existing Rhipe footprint.<\/p>\n

Ord Minnett observes Rhipe's business is garnering a higher profile across the Asia-Pacific region, having made a number of accretive acquisitions. Cyber security is increasingly significant for both large and small enterprises as numerous cyber attacks have recently demonstrated.<\/p>\n

<\/p>\n

The EMT acquisition, therefore, becomes a winner, in Bell Potter's view, as it also diversifies the existing business away from Microsoft and leverages the growing cyber security market<\/strong>.<\/p>\n

The consideration for EMT Distribution is $11m up front with a further $2m available as an earn-out over the next two years. Ord Minnett expects EMT will complement the Rhipe "SmartEncrypt" product.<\/p>\n

There is another part of the EMT business in the Middle East which delivers $500,000 in operating earnings and Rhipe has indicated it may also acquire this after further due diligence.<\/p>\n

EMT Distribution reported Australian and Asian sales of $19m and underlying operating earnings (EBITDA) of$1.9m over the past year. As a result, Ord Minnett increases revenue and operating profit forecasts for Rhipe in FY22 by 6%, retaining an Accumulate rating and $2.45 target.<\/p>\n

Bell Potter believes the deal will address a number of concerns investors have had regarding Rhipe over the past twelve months such as margin compression and reliance on Microsoft, as well as a "lazy" balance sheet after the capital raising.<\/p>\n

The main leverage has come through acquiring specialty businesses, a smart move Shaw and Partners observes, also welcoming the diversification away from Microsoft and greater cross-selling opportunities. The value to clients subsequently increases and margins become more sustainable over the longer term.<\/p>\n

Now, with a balance sheet that is well-placed to pursue accretion outside of organic growth, the broker expects there will be more acquisitions to come.<\/p>\n

Cashed Up<\/u><\/p>\n

Post the EMT acquisition, Rhipe is expected to have more than $45m in cash at the end of FY21 with around $80m available further acquisitions. The broker considers the stock is underrated by the market, given the cash generating nature of the business.<\/p>\n

Australasia remains the company's largest market, accounting for around 70% of total sales, and with the pandemic under control the region's economies are performing significantly better than previously expected. Following the EMT acquisition, Shaw upgrades estimates by 8% for FY22 and 7% for FY23 onwards, maintaining a Buy rating with a $3.04 target.<\/p>\n

Moreover, the broker suggests Rhipe is the purest play in terms of cloud growth within Asia-Pacific and provides a way for investors to gain exposure to Microsoft, VMware, Symantec, IBM and Citrix as they are all vendors.<\/p>\n

Rhipe has achieved scale in many of its markets and should, therefore, offer increasing levels of profitability, Shaw adds. Having a solution backed by intellectual property is expected to provide advantages and market share over other cloud wholesalers<\/strong>.<\/p>\n

The business is also light on capital expenditure, specialising in online marketing\/customer acquisition. Bell Potter, with a Buy rating and $2.50 target, agrees there is ample potential for further acquisitions to build out the vendor portfolio and expand earnings.<\/p>\n

The broker assumes a gross margin of around 30% which compares with the first half licensing margin of 12.7%. The second half is expected to show accelerating sales growth which, combined with this latest acquisition, should lay the foundation for another strong year in FY22.<\/p>\n

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