The Citadel Group (ASX:CGL) share price fell 35% on Friday, after the company released a profit warning revising down its FY19 financial guidance to between $97 to $104 million. What was the underlying driver of this, and will this be a continuing trend for the company?
What does Citadel Group do?
Established in 2007, Citadel Group is a software and technology company that specialises in IT security. Citadel has over 200 employees across Australia providing secure information to support real-time decisions across the Health, National Security, Defence and Other Enterprises.
Revision in FY19 Financial Guidance
On Friday Citadel Group provided a trading update to the market, indicating it now expects FY19 revenue to be in the range of $97 million to $104 million. Added to this, gross profit margins are also expected to reduce to approximately 46%, while earnings before interest, tax, depreciation & amortisation (EBITDA) is forecast to be in the range of $22 million to $24 million for the full year — a 32% drop from the prior year.
The downward revision in Citadel Group’s financial performance expectations was attributed to two factors:
- Customer-controlled project extensions, originally expected to commence in H2 FY19, now more likely to be in H1 2020 (reading between the lines, I suspect the federal government election and its associated caretaker mode has led to a slow down in Canberra spending)
- Not expecting the same increase in customer spend in Q4 as had occurred in previous years
However, it’s not all bad news. The company indicated in their market announcement that the medium and long term outlook remains strong. The company also reconfirmed its transition towards a more diversified portfolio, with a shift in revenue from higher margin consulting and managed services business to SaaS and related software services (I see this as a shift to more stable and recurring revenue; this is a good thing longer term).
As a result, the Citadel Group board expects to deliver strong growth momentum across all business areas in FY20.
Good chance to buy-in?
It is not surprising the company’s revenue has taken a hit due to both the federal election and its continuing diversification of its revenue mix. However one needs to remember IT services business often exhibit lumpy earnings as workloads rise and fall due to shifting client demand. At this stage, Citadel Group’s long term outlook generally appears positive.
So what is the intrinsic value of Citadel Group and should I buy-in now?
The Strawman consensus valuation currently sees the stock as undervalued. Click the button below to see what the Strawman community is saying about this stock:
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