Wow, this came out of left field.

Private equity group Pacific Equity Partners will acquire 100% of Citadel for $5.70 per share, in cash. Up to 15c of this will be in the form of a fully franked dividend, which provides a further 6.4c in benefit. It values Citadel at just over $500m in enterpirse value -- or almost 15x EV/EBITDA.

This is a 42% premium to the last traded price. 

Shareholders can elect to retain an interest in Citadel via a scrip alternative (see announcement for details). But note that these will probably lack the liquidity of ASX traded shares.

Shareholders will get a scheme booklet in late October, and the deal is expected to be implemented at the end of the year. 

This seems like a good deal for shareholders, and is above my most recent estimate of value. I just wish i had the conviction to buy more when shares crashed earlier this year.

With shares trading at $5.57 after today's close, there's a 2%-odd arbitrage opportunity for those that can be bothered. I'll likely just sell on market so I can redeploy the funds sooner and avoid the wait.

Citadel's results were ok in my view.

Good (underlying) growth, defensive characteristics, high margins and recurring revenue. Dividend maintained (shares on a 2.6% fully franked yield). 

The business continued to shift more towards software and higher margin recurring revenue, with a much bigger focus on health. As with Alcidion, the company pointed towards the growing opportunities in this sector.

If we go with the underlying numbers (which strip out acquisition transaction costs and contract adjustments), CGL has 14.6c in per share earnings, which is about 9% below FY19. 

However, the Wellbeing acquisition contributed only a few months worth of earnings. On a proforma basis, assuming a full year's contribution, EPS would be closer to 19c or 18% growth.

The buisness has stripped out $1.5m in costs from Wellbeing, and this part of the business is performing in line with expectations

This is really just a question on how well they execute on the opportunity they describe. The business is now (in principle) better structured to take advantage of the opportunities and deliver more attractive returns.

No guidance was issued, but the company reiterated expectations for long term 15% organic revenue growth for its software segment, and 5-10% for services. Given the current breakdown, that averages out at around 11% for the total group. Also important to note that software has margins of 65% versus services margins of roughly 30%.

I will update my valuation shortly.

Full results here

Citadel has updated shareholders on the impacts to date from the coronavirus crisis.

Key points:

• No significant projects or contracts have been delayed or cancelled, so far.
• Customers are predominately from Government and Health sectors that are long-term contracts and for business critical software applications.
• Citadel manages 42% of Australia's public pathology records, and is working with Healthcare providers to adapt to new tech that supports virus testing.
• The company is planning on reducing opex, delay any non-essential investment and manage liquidity and cash flow within debt covenants 
• Wellbeing is seeing opportunities arise across various products and services. 70% of its revenues are recurring, genereated form long-term contracts.
• Post merger, Citadel expetcs to have $10m in cash and an undrawn facility for a further $10m
• The company will still pay its interim dividend.

ASX announcement here

Citadel has been punished more than most during this sell down. 

Shares have lost over 70% since Feb 17.

One of my best Strawman recommendations ever...

With health now a major segment, the coronavirus is going to have a direct impact. While it may be true that a lot of the health segment has high margin and recurring revenues, it's not going to be easy to make new sales into an overstretched and critically under-resourced health system. We'll also get to see just how recurring much of those revenues are.

The other problem is that around 2/3rds of revenues come from services and consulting - and demand for services is likely to take a massive hit over the coming year as customers focus on bigger priorities.

And all this just as the company took on more debt to fund the acquisition of Wellbeing, and now has a worthless share purchase plan following the institutional raise.

With a lot of long-standing government contracts, I had assumed that Citadel could survive a downturn, but I hadnt accounted for such a material shock.

This recommendation is very much under review.

Citadel announced the acquisition of UK based health-tech company Wellebing for an enterprise value of $198m. The cash required was $189m, of which $127m would be raised through the issue of new shares.

They also took on $90m loan and $10m working capital facility. 

On 27th of Feb, Citadel said it had already raised $34m from an unconditional placement of shares to institutional and sophisticated investors, and "firm commitments" for the $93m to be raised through the conditional placement -- which will be voted on at an Extraordinary General Meeting (EGM) on March 30. 

Given the current market price, you have to wonder how "firm" those commitments really are! The retail SPP was also looking to raise around $10m, but that's not going to happen. 

HOWEVER, the ASX announcement on the 19th Feb says the institutional component was underwritten by Royal Bank of Canada. But i'm not sure that means Citadel still gets $4.65 per share given it still needs to be put to an EGM. (does anyone know?)

If this isnt the case, it looks like they will need to issue a lot more shares to raise the same money. At the current price, around 31m in total, compared to the original 20m for the conditional placement.

So we are now looking at a post acquisition share count of ~88m, versus the originally expected ~77m (assuming cash is raised at $3 per share -- it could well be lower!)

Effectively this makes the acquisition cost of Wellbeing much more expensive.

Some more on-market purchases from Directors. The most notable is from long standing director Mark McConnell, the second largest shareholder.

He purchased a further 104,600 shares at $4.77 each on the 19/2/20 (about $500k worth). He owns around 12% of the entire company.

Directors Robert Alexander and Peter Leahy purchased $35k and $47k on the same day, respectively. 

Citadel has acquired UK based health software company Wellbeing for $198m. It provides radiology and maternity workflow solutions in the UK to 150 clients and has a large market share. 

The company generates around $31m in revenue and $12.5m in EBITDA. Revenues and margins have been growing well in recent years. 

It's a very BIG move, increasing the EBITDA by almsot 50%, and the share count by ~60%. It significantly expands their healthcare revenues and gives them an established fotthold in the UK market. Importantly, most revenue is recurring in nature and at better margins. It also has big cross-sell potential.

After the deal, the group will have ~$90m in debt (debt/equity of 42%) and $16m in cash.

All told, it seems to make a lot of sense. Citadel is well practiced at acquisitions, and this latest one improves the financial profile and business quality. As always, there could be digestion pains, and operating in a new geography is always tough.

At 13.2x forward EV/EBITDA, it's not cheap, but not unreasonable if Wellbeing can sustain its recent growth and Citadel can effectively cross-sell it's products into the UK market.

More info in the company presentation slides here 

A lot to digest here. Share market reaction is brutal (down ~20% after open), but there's some context to be aware of. 

Starting with the results:

Total revenue for the 6 moths to December 31 was 25% higher at 61.1m. However, exlcuding the contribution from the recent Noventus Acquisition, revenue was essentially flat from the previous corresponding period.

(In saying that, it looks like that acquisition is working out well -- they paid only $5.7m for that business last year, which was generating $17.5m in full year revenues and 2.1m in EBITDA)

Reduced gross margins and operating margins resulted in a 5.3% decrease in EBITDA to $12.5m

Although none of this sounds great, Citadel has clearly articulated it's strategic shift towards its software segment -- which has lower margins than services revenue, but longer durations. And in this segment, revenue was up 18%. The Noventus business also operates at lower margins, which impacts the group average.

Post the Wellbeing acquisition (detailed in another Straw), the group expects 63% of total revenues to come from the Software segment, up from 47%

The company reiterated guidance of revenue and EBITDA growth for the full year, with ex-Noventus margins "broadly consistent". Specifically, revenue of $128-132m and EBITDA of $28-30m for the existing business.

On a pro-forma basis, including Wellbeing for a full year, FY20 group revenues and EBITDA would be $163.1m and $42.9m, respectively.

The purchase of Wellbeing is expected to be EPS accretive in FY20 and FY21, growing at upper single digit rates.

Although shares dropped significantly on the open, it's really just lost the last few weeks of gains, and remain above the issue price of new shares (for Wellbeing acquisition, of $4.65, a 12.5% discount to the 10-day volume weighted average price. 

I still remain optimistic towards Citadel and hold on my Strawman scorecard.

Results came in almost exactly at the midpoint of guidance.

Nevertheless, it was a tough year with a more than 40% drop in profits. This is however largely explained by the trasnition to a SaaS model and the delay (but not cancellation) of key projects.

Costs were flat, debt was reduced and Saas Revenue was up strongly.

Profit was lower than i had anticipated, so i have reduced my valuation. Nevertheless, shares remain decent value for a long term hold.

Results presentation can be viewed here

3/2/2020

The Dept. of Defense has elected to exercise its extension options, which will take the support contracts through to July 2021.

The DoD is expected to soon issue a tender for the longer term sustainment contract. Citadel is hopefully well placed to win this work too (but we will see).

Citadel has also moved from preferred supplier status to a ful contract with Genovic. This is valued at $500k for the initail stages, with options to extend.

Full ASX annoucement here

On another note, it's also encouranging to see Pie Funds (a NZ based fund manager with a solid track record) increase its stake from 7.42% to 9.45% last week.

May 2019

3 directors have purchased shares on market. Hardly backing the truck up but not insignificant amounts -- usually an encouraging sign

Harry Kevin McCann (Chairman)

10,000 shares for a total consideration of $44,221

Total shares held now 293,000

Mark McConnell (non-executive director)

9,000 shares for a total consideration of $40,014

Total shares held now 6,009,000 (14% of the company andthe second largest shareholder)

Peter Leahy (non-executive director)

6,745 shares for a total consideration of $29,745

Total shares now held 56,745

Citadel has forecast a big drop in earnings due to customer-controlled project delays, a less than expected increase in Q4 sales, and reducing margins as part of the planned transition to SaaS delivered services.

Revenue will now by ~7% below last year, with EBITDA likely to drop by ~32%.

Shares fell sharply on the news, but that was a large over-reaction in my opinion.

IT consulting businesses are notoriously lumpy and you can often see big falls that are unrelated to the quality of service delivery or the longer-term growth potential. Also, the transition to more recurring revenues is a smart move that will build a better business in the longer-term, but will impact margins and earnings in the short term.

There is a huge industry tailwind for Citadel, and it is very well positioned among its target client market.

Not yet held or recommended on Strawman, but plan to dig into this opportunity more in the coming week.

Full ASX announcement here

A provider of technology services togovernment and large corporate customers in areas such as knowledge management, consulting and organisational integration.

The increasing need for cyber-security provides a genuine and strong tailwond, and Citadel has many established relationships and industry dominance in Australia.

As a services business, sales will be lumpy. And they will see a short term impact as they transition to more of a SaaS model. But the medium to long term growth prospects are encouraging.

Aligned management, strong balnce sheet and a good level of recurring revenue.

Co-founder and newly appointed CEO Mr Mark McConnell has bought 50,000 more shares on market, increasing his stake to 6.066m shares, or ~12% of the company.

There has also been buying by two other directors in the past week.

Citadel has announced the resignation of both its Chairman and CEO.

See ASX announcement here

Departing Chairman Kevin McCann has stepped down after 5 years in the position and will be replaced by Peter Leahy who has been a non-executive directpr since 2014.

Departing CEO Darren Stanley has stepped down after 3 years at the helm and will be replaced by Mark McConnell who was a co-founder of Citadel and a current director. He has ~6m shares in Citadel (or around $20m at the current share price).

No specific reasons were given other than now being "the right time".

Obviously, this raises concern over the real drivers for this change and the market response has been (understandably) rather negative.