Empired Downgraded Its FY19 Earnings Guidance On Failing To Secure A Service Contract With Main Roads

Information technology stock, Empired Ltd (ASX: EPD) plunged over 19% after the news informing Empired not being selected as the preferred bidder with Main Roads surfaced among investors. In addition, the company downgraded its FY19 Underlying EBITDA to be between $1.5 million and $2.0 million less than originally anticipated.

The market bears carved out as much as 19.231% from the stock to let it close at $0.315 on 7 May 2019.

In the announcement to the Australian Securities Exchange, Empired Ltd stated that it has not been selected as the preferred bidder with Main Roads WA but has been selected as reserve bidder for Contract 125/17 - Provision of ICT Infrastructure and Systems Services 2018-2023.

This is in reference to the replacement requested for Empired’s current contract, secured in October 2013. Under this ongoing contract with Main Roads, Empired agreed to provide Infrastructure services for the term of 5 years and an estimated value of $48 million. It is expected to continue until the extended date of 10 August 2019.

Empired further informed that during the second half, Main Roads has reduced the services under the existing contract in preparation for transition to the new contract. This has led to a reduction in FY19 earnings expectation and it is estimated to further impact the revenue in FY20, which is estimated to be approximately $10 million.

Russell Baskerville, Managing Director, Empired said, “The company is extremely disappointed that it has not been selected to provide ICT Infrastructure and Systems services to Main Roads. However, it respects the Main Roads decision and will work closely with Main Roads and the new service provider to ensure a smooth transition of services.”

However, Empired stands confident that growth in other areas of its business will offset this reduction and lead to relatively flat revenue growth in FY20. The company continues to have in excess of $200 million in qualified strategic contracts that it will contest over the coming 12 months and expects to have news to report in the coming months.

Today, Empired has also released the results for the first half of Fiscal 2019. The group’s revenue has increased by 4% to $89 million compared to the previous corresponding period. EBITDA inclined by 23% and NPAT by 50% to $8.2 million and $2.2 million, respectively. COGS & Expenses restated in H1 FY18 for consistency with modest margin expansion during the period as services skew to digital solutions.

The key highlight of the period remains the multi-year, multi-million dollar digital transformation contract secured in NZ Public Sector with DIA. It formed 64% of revenue in 1HFY19. The company now expects revenue from these multi-year contracts to grow further in FY20 with increased SaaS revenue and managed services revenue.

On geographic front, Australia revenue grew by 7% with digital solutions revenue up by attractive 16%. However, New Zealand revenue was down 2%.

The company reported that operating cash flow was impacted by working capital outflow. But going forward, the company expects high full-year operating cash conversion and cash generation.

EPD closed at a price to earnings multiple of 11.080 x with a market capitalisation of $60.85 million. Over the past 12 months, the stock has declined by 16.13% including a negative price change of 18.75% recorded in the past three months.

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