From what I can see, this result seems to be largely in line with what was reasonable to expect, and the market appears to have over-reacted.
Of the ~5.0m$ revenue decline in ANZ vs pcp, roughly half can be attributed to the loss of the NSW government contract, whereas revenue from Asia has been stable.
The fact that FY19 EBITDA guidance is now assuming a small improvement in copyright costs suggests that Management expect some further revenue deterioration during the second half (which is probably part of the reason why the market has reacted negatively to the result); but, all things considered, I don’t see anything in these figures indicating that underlying EBITDA cannot be stabilised around its current run rate of ~22m$ pa.
Cash conversion was very good, and also good to see that the Company was able to reduce Net Debt further during the first half. Free Cash Flow generation should increase meaningfully, during the second half (to 4.5-5.0m$, all else being equal), thanks to the disappearance of contingent considerations. Note that the CFO, during today’s call, mentioned that the residual contingent payments (~1.4m$ in total) were unlikely to be paid out during the next two years, which would further enhance FCF.
So, under a base-case scenario of 22m$ EBITDA in FY19/FY20, and assuming a further reduction in Net Debt by 4.5-5.0m$ during 2H19, ISD should already find itself on a [Net Debt]/EBITDA ratio of ~1.65x by next June, which in my mind already represents a significant amount of de-risking. Plus, they should be able to generate FCF of 9.0m-11.0m$ in FY20 (probably more towards the low end of the range, factoring in some increased spending in product development).
Overall, I still see the case for medium-term (12-18 month) deleveraging as being unchanged after this set of results. Thus, at its current EV/EBITDA of only 4.0x, ISD continues to look very undervalued to me, and I have added to my holding accordingly on these news.
