While on face value the 1H17 result looked excellent, upon deeper analysis it appears that at least on one critical metric the company took a step backwards.
Viewed another way, the company converted $1 of profit made into
FY1552cents of free cashflow
FY1674cents of free cashflow
1H1755cents of free cashflow
For such a capital light business as this, where capex is only about 1% of revenue, we need to see something close to a 100% conversion ratio of profit into free cash. 55% in 1H17 is not good enough.
The problem has been receivables management, which has seen the closing receivables balance grow from 20% of revenue in FY13 to 27% of revenue in FY16.
We need to hold the company to account when they say "we expect solid operating cashflow in 2H2017" because I believe this is holding the company back from prospering.
It is worth noting that pleasingly receivables did fall in 1H17 (annualising to about 20% of revenue again), but the company also made a big dent in payables and hence we didn't see a flow through to strong cash generation. Let's hope we see the flow through in 2H17.
On another metric, the EBITDA margin has slipped from 14.3% in FY16 to 13.1% in 1H17. This could be a seasonality issue as it did improve during 2H16. If we don't see improvement back towards a 14% EBITDA margin - it means for every 1% slippage in EBITDA margin, revenue has to rise about 7.5% just to tread water! We'd much prefer to see revenue growth filtering through solidly to the bottom line.
RXP Price at posting:
79.5¢ Sentiment: None Disclosure: Held
