14/11/22 CPT Global Investor Brief and AGM Presentation

FY22 ended up being a transition year for CGO, as the business moves to a US focused operation after the CEO role was taken over by the former manager of the US who has done a fantastic job driving growth there.

US revenues continue to grow strongly and margins held up well despite some travel costs coming back post-Covid restrictions. Management guided to putting on new sales staff in the US to leverage that momentum further. Conversely, Australia had a tough FY22 with some major contracts rolling off:

Put it all together and FY22 ended up being weaker than expected but the growth in the US shows great promise moving forward. Some one-off costs hit the 2H22 in particular but based on the commentary I expect FY23 should see CGO earning $2-3m NPAT.

24/8/21 Preliminary Final Report

A great report from CGO, registering strong revenue growth and a record profit result. Headline numbers were 34% revenue growth to $33.3m and NPAT more than tripled to $3.4m (with no Government support).

The report was a pleasure to read with management clearly articulating the current business and it's potential but also the growth paths open to them with a defined five year plan to build software tools that can eventually be sold under a SaaS model.

Half on half, 2H was a bit weaker than the 1H but management flagged this in prior updates given the big pull forward of demand as Covid hit with customers rushing to digitise solutions and CGO's testing and tuning services in high demand as systems designed for pre-Covid levels of activity were being overrun.

Nonetheless, 2H was still highly profitable as tailwinds of reduced travel costs continued to help, and management conceded that while some travel will return, conversations wtih clients suggest many will allow remote work moving forward. Over the year, $1m in travel costs were saved, with USA down 87% and Aus down 55%. 

Geographically, Aus revenue grew 51% and USA grew 35%. A specific percentage wasn't provided but management commented that Canada in particular was weak on the back of a key client delaying services. 

The balance sheet is pristine with $4.3m cash and no debt and cashflow was strong despite some prepayments being made.

Looking forward, management commented that they are seeing a bit of fee pressure from clients which will likely see FY22 flat, but given the record result it would still be a solid achievement. From a margin point of view, labour shortages mean some increasing in contractor costs may crimp margins a little.

19/2/21 Half Yearly Report and Accounts

A fantastic result from CGO with revenue growing 50% to $18.1m and NPAT growing 160% to $2.3m. The highlight was how clean the result was with no adjustments or Government stimulus included.

The factors driving the result continue to be those outlined in the FY20 annual report and AGM addresses, primarily expanding work within existing customers and restricted travel meaning significantly higher margins.

Interestingly, management stated they generally charge clients at cost for travel and book through revenue, meaning "organic" revenue growth (ex-travel costs) may be much higher than 50%.

While free cashflow looks weak at $1.4m, management decided to reward employees by pre-paying January wages before Christmas. Adjusting for this $1.7m outflow, free cashflow of $3.1m is over 100% conversion to PBT of $3m with continued control of working capital.

The interim dividend of 2c provides a solid yield at current prices, however the payout ratio of 35% is well below management's target of 70-90%. I suspect this is due to the decision to pay wages in advance putting a short term strain on working capital. Regardless, assuming 2H20 remains consistent with this half, a 6c final dividend is required to hit the bottom end of their payout ratio guidance.

Outlook for the 2H and beyond seems positive with 93% of Australian budgeted revenues contracted and 70% in the US with some contracts in the final stages of negotiations. On top of this, work in progress of $1.4m sits on the balance sheet to be billed. Headwinds highlighted include some revenue expected in 3Q brought forward into this result, some key customers experiencing revenue declines and negotiating lower contract values and a large Australian project set to finish in April.

27/1/21 Market Update

CGO clarified the status of contracts with their two largest clients which were up for renewal at the end of 2020. Management confirmed that the Australian client has extended until 30 June 2021 and the US client has extended one stream of work to 31 December 2021 and two others to 31 March 2021 (thought they expect them to be extended to 31 Dec as well in time).

With these contracts extended there is now better visibility over 2H21 and I have adjusted my PT accordingly.

25/11/20 CFO's Address to Shareholders

A great AGM update from CGO who gave more detail in the turnaround of the business in the 4Q20 and continuing momentum into FY21.

4Q revenue in the US was up 40% on the 3Q and in Australia it was up 37%. This was attributable to growth with existing customers and new customers coming online. This momentum has continued into FY21 with the first four months revenue of $12.2m already exceeding the $12.1m from the whole first half of FY20 (suggesting that ~30% revenue growth run-rate has continued, although admittedly hard to say definitively without knowing seasonality).

Profit margins have expanded substantially since Covid with FY21 to date being 17.7% compared to 3.6% in FY20 and 6.0% in FY19. This is largely due to savings on travel costs as employees are able to service clients to the same degree while working from home.

Management refrained from providing firm guidance on the remainder of FY21 due to general Covid impacts and the fact their two largest customers have their contracts up for renewal in December. Management are confident they will be renewed, but the terms may vary and until they are executed the risk is material.

The other comment on outlook is that despite Covid making it difficult to engage with new clients without travel, the pipeline in the US and Australia is "strong and deep".  Growth is likely to come from existing customers and re-engaging with old customers and contacts.

The last interesting point was commentary around the dividend. Management will return the payout ratio back to the historical levels of 70-90% of net profit. Working back from the FY21 to date profit before tax update of $2.2m, this suggests NPAT of $1.7m (blending Australian/US tax rates) and conservatively using the lower end of the payout ratio is a $1.2m dividend or 3.1c. This means a ~10% fully franked yield on just the first four months profit of FY21. If key customers can be re-signed and momentum maintained the FY21 dividend yield could be somewhere between 20-30% at current prices.

30/9/20 Annual Report

A few scattered thoughts sitting down and reading CGO's annual report this week:

Commentary from the Chairman/CEO highlight the strong turnaround in the business throughout FY20. The Australian business entered the year with a "weak pipeline" but through the year won two new large customers and exited FY20 on a monthly revenue run-rate ~50% higher than the start of the year. The US experienced a similar trajectory, finishing the year with a ~30% higher monthly revenue run-rate.

Covid travel restrictions were a positive for margins as employees were unable to travel to service clients. Like most businesses, shifting to online collaboration meant generating the same revenue at significantly lower costs without travel. Specific amounts were not broken out, I will see if management can shed any further light. It is a benefit I expect to flow on through FY21 at least though.

KMP have plenty of skin in the game and are remunerated very reasonably. The CEO owns over a quarter of the business while other KMP are all top 20 holders. Total remuneration is around $2m, but was around $1.6m in FY20 as KMP took a pay cut and passed on STI's as Covid hit.

Business currently has $3.1m cash on the balance sheet, but also $645k in tax receivable due to overpaying tax in the US and utilising tax losses under their new CARES Act as a response to Covid.

There is currently $2.5m of franking credits in the business and given the cash balance and cash generation it wouldn't surprise me to see a special dividend in FY21.

IT consulting firm focused on solutions for large blue chip clients. Emerged through some issues from FY15 to FY17 by re-focusing their operations in key geographies (Aus/US) and has been profitable the last three years.

Covid has been a strong tailwind as customers rush to upgrade digital services which saw strong growth in 4Q20 continue into a recent 1Q21 update and a sharp re-rate in earnings.

Customer concentration is a risk, with key customer contracts up for renewal on 31 Dec 20 clouding FY21 guidance.