Progility (PGY) is the holding company of a project management services group specialising in people, processes, training and systems integration. This is a long post so I'll summarise the investment opportunity:
- PGY was formerly known as ILX, a training company and market leader in PRINCE2 management and other employee training.
- The company is close to inflection point after a restructure and multiple earning enhancing acquisitions.
- A CEO has a good track record of realising shareholder value in US listed companies.
- A concert party of management who own the majority of shares are risking their own capital to back the companies growth.
- PGY is developing an international footprint and has cross selling opportunities across a blue chip client base.
- The interims due in March should provide a short term catalyst to share price appreciation.
- A no growth revenue model suggests a PE of between 5.4 and 5.9 for FY15.
BACKGROUND
PGY was formerly know as ILX who listed in 2000 fueling growth through a number of bolt-on acquisitions in a fragmented management training industry. As the effects of the recession began to bite, companies slashed their training budgets and ILXs revenue declined. Previous management tried to various measures, but mostly succeeded in diluting shareholders with two rescue share issues.
ILX continued to face challenging market conditions and in 2012, announced a subscription by Praxis Trustees of 1.2mn in exchange for 29.9% of the share capital. The purpose of the investment was to reduce ILXs indebtedness and to provide working capital. On completion of the investment, Wayne Bos was appointed Executive Chairman, and subsequently and in addition) Interim Chief Executive. Bos quickly developed a plan to transform the company.
MANAGEMENT
Wayne Bos is one of the key reasons why PGY looks interesting. Bos has proven abilities in the M&A field and a strong record of realising shareholder value. His early career can be traced back to the mid-eighties with the development of Technology Business Integrators and Spectre Management. Both companies share the same characteristics of PGY specialising in technology integration, consulting and project management. Bos left Australia at the end of the nineteen nineties arriving in London where he worked with the management team of Uniqema, a division of Imperial Chemical Industries to form Symex Holdings Limited which was successfully listed on the Australian Stock Exchange. Bos had already acquired a reputation as a talented M&A specialist with outstanding leadership qualities. However, a meeting with Aussie dot com boom poster boy Steve Outtrim led to Bos' appointment as CEO of Sausage Software in 1999. Outtrim had floated the company in 1996 in an attempt to put the company on a firm business footing, however, Sausage's fortunes had languished, with shares plummeting from a high of $2.75 to a low of 8.5 cents. Bos transformed the company, buying twenty companies and boosting turnover from 5mn dollars to 150mn dollars, with the share price peaking at $8.20. Sausage merged with SMS Management and Technology in May 2000. Bos moved on soon after, settling in the US where he served as the Chief Executive Officer and President of Natrol Inc. Natrol’s revenue was $65.6 million in 2006 within the space of three years Bos had grown revenue to $90 million before the company was sold to Plethico Pharmaceuticals.
OWNERSHIP & CAPITAL STRUCTURE
After the completion of the reverse takeover of Progility Pty, the ownership of the company is highly concentrated in the hands of concert party that hold 171,673,504 shares representing 85.98% of the company. The concert party consists of Wayne Bos, Mario Vecchio and Craig Cameron. Bos and Vecchio have worked and co-invested together in a variety of businesses over many years including Sausage Software and PGY. Bos and Cameron has also worked together in a number of businesses over several years including Natrol Inc., Minergy Corporation Limited and PGY. Praxis is trustee of the DNY Trust of which Wayne Bos, together with his wife and family members are discretionary beneficiaries. Mmilt is the trustee of the Vecchio Family Trust, a trust of which Mario Vecchio, together with his wife and family are discretionary beneficiaries. The Cameron Investment Trust became a shareholder in PGY following Craig Cameron being appointed Chief Executive Officer of PGY. Craig Cameron, along with his wife and family are discretionary beneficiaries of this trust. The admission document provides a biographical background on both Cameron and Vecchio to help fill in the gaps.
Bos via Praxis also has the right to another 8,000,000 shares taking the total concert party holding to 179,673,504 shares representing 86.52% of the company. I imagine that I have just lost a significant number of readers, however I will give my reasons why I'm comfortable with the associated risks of high insider ownership in due course. PGY have 199,666,880 shares in issue and a free float of 19,993,376 which is 13.48% of the company. The concentrated ownership would have usually resulted in concert party being obliged to make an offer to all shareholders to acquire their shares. Following an application by the concert party, the takeover panel agreed to waive this obligation subject to the approval of the shareholders at the 2013 general meeting. All resolutions were passed meaning that long suffering ILX shareholders experienced severe dilution.
Bos completed the reverse merger of PGY for 16mn taking the PGY name. Bos and Vecchio essentially gave themselves 16mn as they had purchased Progility in 2008. Bos and Vecchio are using their own capital in the form of loan notes to fund PGYs expansion. The exact amount of capital they have supplied themselves is unknown, we do know that Praxis Trustees have made 30mn available in loan notes at commercial rates, via Progility Finco, PGY's incorporated subsidiary.Let's tackle the potential 86.52% ownership issue. There are three key reasons why I'm currently happy to invest alongside Bos et al:
- They could have taken the company private from the outset, which leads me to believe,at least in the medium term that are committed to remaining listed.
- Management, primarily Bos and Vecchio are risking their own capital via their holding trusts as previously outlined.
- Bos has generally worked in shareholders best interests.
THE NEW PROGILITY GROUP
Since appointing Bos he has changed the group significantly with seven acquisitions to date. He added Obrar Limited a technology and communications consultancy established in 2010. Bos stated that “we know the Obrar Managing Director David Hopkins and his team well, having been in contact and watching their growth and progress over several years”.
The largest and most important acquisition came in the shape of Progility Pty Ltd. Post reverse takover, Bos continued to add companies with CareShield Training and Sue Hill Recruitment, a small specialist recruitment consultancy in 2013. Last year saw three further acquisitions medical fit out specialist Starkstrom Group paying 5.4x historic EBITDA for Starkstrom, UK market leader in specialised services to operating theatres. Starkstrom will give PGY the opportunity to cross-sell its communications products (systems integration, telephony and related services) which are well established in Australia to hospitals in the UK. In December 2014, PGY Woodspeen Training Limited were added to the training department, strengthening the Progility proposition to the public and education sector. Finally ex-Siemens, Indian communications company Unify was added in December 2014.
Wayne Bos commented: "We ended 2014 by concluding the acquisitions of Unify India and Woodspeen Training. Together with Starkstrom, our most significant acquisition in 2014, we have made great strides in expanding our platform of systems integration and project management services internationally. In 2015 we will continue to work hard not only on developing and integrating our individual businesses but also by leveraging the opportunities we now have to link and collaborate across our various regional activities. In addition we will continue to add further businesses to the Group to accelerate achieving a business with significant critical mass."
Training
The founding division of the Group, the training business operates under the ILX brand. ILX is a leading global training provider for project programme and portfolio management, IT service management and business financial literacy. ILX has trained and accredited over 100,000 project managers over the past 25 years and works with over 5000 businesses in over 100 countries. ILX delivers unique technology-led learning solutions and best practice training for PRINCE2 project management. ILX has offices in the UK, Dubai and Australia
Recruitment
Based in the UK, the recruitment services operate under three brands; TFPL, Sue Hill Recruitment & Progility Recruitment. TFPL was established within the Group in July 2013 with Sue Hill acquired in November 2013. Together, they form a recruitment division which boasts a pool of over 10,000 candidates trained in project management services. Progility Recruitment was born in January 2014 and offers specific project management recruitment services.
Consulting
With over 30 years' experience in this sector, the consulting division operates under two brands; Obrar in the UK and ILX Consulting in London, Dubai and Australia. Obrar is a consulting and project management services company, focused on multimedia-driven call centres, corporate technology infrastructure and operational change. ILX Consulting is an organisational improvement and project management services company, specialising in information technology, service and supply chain improvement and overall project and programme management. Progility Consulting operates in Australia providing organisational improvement and project management services company, specialising in information technology, service and supply chain improvement and overall project and programme management.
Technology Solutions
Progility Technologies operates a communication systems integration business that designs, implements and maintains project management solutions for medium and large enterprises. Its focus is on the transport, utilities and healthcare industries in Australia and on the mining industry globally. The business is headquartered in Melbourne, Australia, with national offices across the country. Progility Technologies has three operating divisions: Communications Australia, focused on communication systems integration; CA Bearcom, Australia's largest distributor of two-way radio communications products; and Minerals & Energy Technologies, which designs, implements and manages an array of integrated communications solutions for specific projects.
Progility Technologies also operates in India through the Unify brand is headquartered in Mumbai and operates through a network of 21 offices throughout India. Finally Starkstrom, joined the Progility stable in July 2014 and is a UK based project management services' company specialising in manufacturing and supplying medical infrastructure equipment for operating theatres and intensive care units. Starkstrom is headquartered in North West London and with a manufacturing and assembly facility in Leicester.
CUSTOMER BASE
As stated ILX has developed a considerable client base of 5000 companies training many of their middle and senior management. ILX is not the only company in the group that has developed a blue chip client base. The Australian PGY company has the likes of Virgin, Qantas and other international companies as key clients. Obrar, TFPL and Unify all have a host of salient brand name clients from across IT, banking and communications sectors. Bos has brought into the group companies that have strong relationships with large companies where PGY's products and services can be cross-sold. This is a small indication of clients across the PGY group:
So where do we begin? How do we value a company that has made eight acquisitions in a few years. A company where revenue has jumped and we have little information to determine traditional value ratios. What we do have is FY14 results and we can estimate earnings for FY15 based on the revenues of the acquisitions not included in FY14 report. My conservative model is based on 0% growth in the core PGY revenue which totalled 38mn in FY14. The operating profit of 2.6mn and profit before tax (PBT) of 1.6mn, this excludes 1.989mn of non-recurring items in FY14. Add the revenues for the new acquisitions, to take a prudent approach we are assuming 0% growth in all the newly acquired companies. In the case of the Unify acquisition I'm assuming a 20% reduction in forecast revenue due to the following comment:
"Our plan is to re-structure Unify India, transitioning the company from being an Original Equipment Manufacturer to becoming a Tier One re-seller and distributor of products in Asia. This process will be disruptive to the business over the short term and this has been reflected in the acquisition price paid, however, we are confident that Unify India, when re-branded as part of the Group, will become an important strategic addition to Progility."
Starkstrom revenue for 11 months will be 12.5mn with a PTB of 1.6mn. The reduced Unify revenue (6 months due to purchase date) will be 8mn with a 0.4mn PBT and Woodspeen will contribute revenue of 2mn and PBT of 0.2mn.
- Continued devaluation of the Australian dollar and other currency risks
- Failure to integrate new acquisitions causing an adverse effect on revenue
- Any further unforeseen non-recurring item/s, write downs
In order to mitigate these possible outcomes,estimated that profit after tax will be in the range of 2.0 to 2.5mn. This translates to an EPS between 1p and 1.2p. At the current price of 6.5p, PGY will be on an estimated PE of between 5.4 and 5.9. Recent highs were over 10p and I would expect the share price to at least reach this point based on forecast EPS figures.
INTERIMS UPDATE
PGY posted interim results on 27th July 2015, with the group delivering revenues for the six months to 31 December 2014 of £24.4 million (2013: £18.6 million). They also recorded a
gross margin improvement to 32% from 28% in the previous year.While the results for the period do not contain contributions from either India or Woodspeen, nevertheless they do show revenues increased by over 30% and gross profit has improved by 47% over the comparable period in 2013.
The annual results for the year to 30 June 2015 are heavily dependent on trading in the last four months of the year, which are critical months for sales across the major businesses of the group, particularly in the UK and Australia.
There were a few significant factors affecting the bottom line including a £413,000 impairment and amortisation charges of £224,000. There was also a £800,000 currency loss due to the weak Australian dollar. The report stated that "We expect a certain level of non-recurring costs in the second half. We also expect the impact of our new business units in India and the UK to contribute only marginally to second half performance while we re-position them."
Despite these factors, PGY reached a diluted EPS of 0.71p. Overall this will be a year of consolidation and bedding in the eight acquisitions that have taken place over the past few years. PGY will then benefit from as clean set of results with reduced one off costs. The only other notable news in the period was that a Hugh Cawley, a new FD was employed, he purchased 200,000 shares the day after.
Disclosure: Long PGY with a 4% portfolio holding