Australia Equity Research
29 August 2014
Overweight
UXC Limited
UXC.AX, UXC AU
Price: A$0.86
FY14 Result: Becoming More Dynamic
▲ Price Target: A$1.15
Previous: A$1.04
UXC’s FY14 underlying PBT was A$25.6m, down 13% on pcp but in line
with guidance. PBT would have increased by 2% if poor execution in
1H14 had not led to project overruns, but pleasingly these issues had been
resolved by 2H14. The company will benefit from 19 new client wins in
FY14 over A$1m and the flow through of acquisitions, particularly in the
Microsoft Dynamics space. We see significant upside based on a valuation
that does not factor in the margin targets to which the company is guiding.
We are Overweight, and raise our Jun-15 PT to A$1.15.
 Result in line with Company Guidance. FY14 underlying PBT was
A$25.6m, down 13% on pcp and in line with guidance of A$25.026.5m. Revenue increased 8% to A$643.4m with 1% being organic and
the remainder due to acquisitions.
 2H14 showed a recovery from project overruns. In 1H14, UXC was
ill-equipped to handle the complexity of some of its larger projects
resulting in A$4.4m in project overruns, without which FY14 PBT
would have increased by 2%. Positively, UXC has fixed this by
controlling delivery to the tendered margin with set deliverables.
 FY15 outlook positive. Management commented that it had seen an
increase in activity in quarter four and reasonable confidence at the start
of the year. It reiterated its FY16 margin targets. Annuity contracts and
the backlog of work yet to be delivered represents 60% of the FY15
revenue target, up from 46% in FY14. The company won 17 new
contracts between A$1-3m and 2 contracts greater than A$3m in FY14.
 FY15 to benefit from acquisitions. UXC made five acquisitions in
FY14 which are expected to contribute annualised revenues of ~A$82m.
The Microsoft Dynamics market has accelerated in 2H14 in North
America with the backlog of work increasing, which will benefit FY15.
 Retain Overweight. We see better discipline in execution and growth
opportunities within the cloud-based businesses and Microsoft Dynamics
in North America, which will drive earnings for UXC offsetting the
continued subdued Australian market.
UXC Limited (Reuters: UXC.AX, Bloomberg: UXC AU)
Year-end Jun (A$)
FY12A
FY13A
Revenue (A$ mn)
560
598
EBITDA (A$ mn)
34
37
Net Profit (A$ mn)
20
24
EPS (A$)
0.06
0.08
P/E (x)
13.5
11.3
EV/EBITDA (x)
7.0
6.7
DPS (A$)
0.04
0.06
Dividend Yield
4.1%
6.7%
Normalised EPS (A$)
0.06
0.07
Normalised EPS Growth
130.2%
5.1%
Normalised PE
13.5
12.8
Source: Company data, Bloomberg, J.P. Morgan estimates.
FY14A
646
36
16
0.05
17.9
7.7
0.04
4.4%
0.06
(17.0%)
15.4
FY15E
699
44
24
0.08
11.7
6.4
0.05
6.0%
0.07
32.0%
11.7
FY16E
720
47
27
0.08
10.5
5.7
0.06
6.6%
0.08
11.1%
10.5
Australia
eBusiness/IT Services
Armina Soemino
AC
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Bloomberg JPMA SOEMINO <GO>
Russell Gill
(61-2) 9003-8625
russell.j.gill@jpmorgan.com
J.P. Morgan Securities Australia Limited
Price Performance
1.2
A$
1.0
0.8
0.6
Aug-13
Nov-13
Feb-14
May-14
Aug-14
UXC.AX share price (A$)
ASX100 (rebased)
Abs
Rel
YTD
-14.0%
-19.1%
1m
14.7%
14.0%
Company Data
Shares O/S (mn)
Market Cap (A$ mn)
Market Cap ($ mn)
Price (A$)
Date Of Price
Free Float(%)
3M - Avg daily vol (mn)
3M - Avg daily val (A$ mn)
3M - Avg daily val ($ mn)
ASX100
Exchange Rate
Price Target End Date
3m
7.5%
5.9%
12m
-21.8%
-32.7%
321
275.67
257.40
0.86
28 Aug 14
1.14
0.88
0.8
4672.00
0.93
30-Jun-15
See page 14 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
Australia Equity Research
29 August 2014
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Key Numbers from the FY14 Result
UXC reported FY14 underlying PBT of A$25.6m, down 13% on pcp and in line with
guidance of A$25.0-26.5m (JPMf: A$25.8m). FY14 underlying EBITDA was
A$36.4m, down 2% on the pcp (JPMf: A$36.8m). FY14 underlying PBT was
A$25.6m, down 13% on pcp (JPMf: A$25.8m). PBT margins fell 1.0ppt to 4.0%.
Revenue increased 8% to A$643.4m, in line with our estimate. 1% of revenue growth
was derived organically while the balance comes from acquisitions.
A fully franked final dividend of A3.0cps was declared, which equated to a payout
ratio of 76% on reported EPS vs. 74% in FY13. The company’s policy is 60-75% of
reported earnings.
Table 1: Group Earnings
Operating Revenue (A$m)
EBITDA (A$m)
EBITDA Margin
EBIT (A$m)
EBIT Margin
PBT (A$m)
PBT Margin
Reported NPAT (A$m)
Normalised NPAT (A$m)
Reported EPS (c)
Normalised EPS (c)
Dividend (c)
Payout Ratio
1H12
255.9
12.3
4.8%
9.5
3.7%
8.5
3.3%
5.5
6.0
1.8
1.9
1.0
56%
% Change
1H on 1H
1H on 2H
6.2%
-8.7%
-17.1%
-50.8%
-1.2 ppt
-3.5 ppt
-26.5%
-60.3%
-1.2 ppt
-3.6 ppt
-32.3%
-62.6%
-1.5 ppt
-3.7 ppt
-61.9%
-79.5%
-20.5%
-60.4%
-62.8%
-79.9%
-24.3%
-61.1%
-57.1%
-78.9%
2H12
304.2
18.9
6.2%
15.6
5.1%
15.7
5.2%
14.2
10.6
4.7
3.4
2.5
54%
FY12
560.1
31.3
5.6%
25.1
4.5%
24.3
4.3%
19.7
16.6
6.4
5.3
3.5
54%
1H13
274.6
14.4
5.2%
11.0
4.0%
11.0
4.0%
8.4
7.5
2.7
2.4
1.8
64%
2H13
319.6
24.3
7.6%
20.3
6.4%
19.9
6.2%
15.6
15.1
5.1
4.7
3.6
70%
FY13
594.3
38.7
6.5%
31.3
5.3%
30.8
5.2%
24.0
22.7
7.8
7.2
5.3
68%
1H14
291.7
12.0
4.1%
8.1
2.8%
7.4
2.5%
3.2
6.0
1.0
1.8
0.8
74%
1H12
2H12
FY12
1H13
2H13
FY13
1H14
42.0
116.4
98.1
-0.7
255.9
47.9
143.3
120.8
-7.8
304.2
89.9
259.7
218.9
-8.4
560.1
48.9
139.0
92.2
-5.3
274.6
43.8
143.2
137.1
-4.5
319.6
92.7
282.1
229.3
-9.8
594.3
45.6
140.7
111.0
-5.6
291.7
-6.6%
1.3%
20.4%
5.7%
6.2%
4.1%
-1.7%
-19.1%
25.9%
-8.7%
2.7
8.9
1.9
-7.8
5.8
2.5
17.1
5.3
-6.4
18.5
5.2
26.1
7.2
-14.2
24.3
3.9
12.6
1.8
-7.4
11.0
1.5
17.5
7.1
-6.3
19.9
5.4
30.1
9.0
-13.7
30.8
3.7
11.6
-0.2
-7.7
7.4
-5.0%
-8.0%
-109.9%
4.6%
-32.3%
149.7%
-33.9%
-102.5%
22.4%
-62.6%
6.4%
7.7%
1.9%
2.3%
5.2%
12.0%
4.4%
6.1%
5.8%
10.0%
3.3%
4.3%
8.0%
9.1%
2.0%
4.0%
3.4%
12.3%
5.2%
6.2%
5.8%
10.7%
3.9%
5.2%
8.2%
8.2%
-0.2%
2.5%
0.1 ppt
-0.8 ppt
-2.1 ppt
-1.5 ppt
4.8 ppt
-4.0 ppt
-5.4 ppt
-3.7 ppt
Source: J.P. Morgan estimates, Company data.
Table 2: Divisional Earnings
Revenue
Consulting
Applications
IT Infrastructure
Unallocated
Total
Normalised PBT
Consulting
Applications
IT Infrastructure
Unallocated
Total
Normalised PBT margin
Consulting
Applications
IT Infrastructure
Total
Source: J.P. Morgan estimates, company data.
2
% Change
1H on 1H
1H on 2H
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Key Issues from the FY14 Result
2H14 showed a recovery from Project Overruns
The 1H14 result showed that a key area of weakness was project execution. It was
impacted by A$4.4m of project overruns from challenges faced in the completion
phase of 4 large projects resulting in unanticipated costs in completing delivery,
rectifying defects under warranty and ensuring customer satisfaction and
referenceability. Though these challenges were faced, only 1 of these 4 projects was
unprofitable.
Though large projects are obviously positive, UXC was ill-equipped to handle the
complexity of some of its larger project wins. The company was not impacted by
these issues in 2H14.
UXC implemented business process changes and renewed its approach to bidding for
fixed price contracts going forward including:
 More disciplined Bid and Solution review processes including participation by
independent and specialist technical capabilities on large, complex projects, new
projects and early reviews
 Breaking larger projects down into discrete parts for each scope of deliverable
work to manage costing better
 Rigorous adoption of more standardised project management methodologies
 Improved customer expectation management
 Increased focus on achievement of tendered margins
 Project dashboard reporting by business unit with KPIs on sold vs. delivered
margin
 UXC has had 150+ substantial projects at any point in time with no known major
issues.
Had it not been for these project overruns, underlying PBT would have increased 2%
on FY13 instead of falling 13%. Improved margins can be achieved by making sure
tenders are priced correctly upfront then controlling the delivery to the tendered
margin.
No Quantitative Guidance but Outlook Broadly Positive
UXC commented that FY15 will provide increased opportunity for growth given the
FY impact of the five acquisitions and improved project delivery processes.
Management commented that “market conditions have been both challenging and
variable by industry and region” but it has seen “an increase in activity in quarter
four and have seen reasonable confidence to the start of the year”… “The FY15-17
targets set are realistic and aim to improve earnings growth for the next three years”.
3
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Annuity-based revenues increasing as a proportion of the business
Annuity contracts and backlog of work yet to be delivered represents 60% of FY15
revenue target, which has increased from 46% in FY14. The backlog is up 20% on
the pcp while the frontlog, or sales pipeline, is up 13% on pcp.
Annuity revenue increased 29% to A$175m and now comprises ~27% of FY14
revenue. UXC re-signed all FY14 expiring Managed Services contracts which
equated to an annual value of A$25m. This included Melbourne Water, Virgin
Airlines, Shell, Fletchers and others.
Figure 1: FY13 Revenue Breakdown by Type
Figure 2: FY14 Revenue Breakdown by Type
112
123
136
346
345
175
Services
Services
Annuity
Annuity
Products & Licenses
Source: Company data.
Products & Licenses
Source: Company data.
IT market remains weak
During FY14 reporting season, numerous listed ICT services companies noted that
weak economic conditions saw clients pursue cost control and market conditions
were challenging across all industry sectors, with a large number of project deferrals
and delays. These market conditions intensified competition leading to increased rate
pressure and margin squeeze.
However many have expect profit growth in FY15 despite market conditions
remaining challenging. Some of the pent-up demand from deferrals is expected to
begin to come through.
According to UXC, market dynamics appear more positive with increased activity
and decision making over the last five months.
4
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Table 3: 1H14 Commentary and Outlook Comments from Key Listed ICT Players
FY14 commentary
SMS Management & Technology (SMX AU)
* Weak market conditions, particularly in Victoria and the ACT have made for
another challenging year. Uncertainty about macroeconomic factors led to project
deferrals and reduced IT spending in many sectors..."
* Performance in the fourth quarter of the year returned to a more traditional pattern
with a seasonal uplift in utilisation and client activity. Furthermore the usual drop-off
in client demand post 30 June has had less of an impact than experienced at the
end of 2013.
Oakton (OKN AU)
* Market conditions during FY14 again remained challenging across all industry
sectors. In particular, there continues to be a large number of project deferrals and
delays by customers.
* It is pleasing to note that outside of NSW and ACT which have been impacted by
reduced Federal Government spending operating performance has shown solid
organic sales
*
Data 3 (DTL AU)
* 2014 has been one of Data #3s more challenging years. With sentiment towards
IT investment remaining flat and in a highly competitive and transforming
technology market,
DWS (DWS AU)
* Trading conditions generally difficult throughout the year with some improvement
observed in 2H (4Q). Clients continue to focus on cost with reductions in capex in
most industries.
Outlook
* Despite ongoing weakness in Victoria and ACT Consulting, improvements in other
regions, recent contract wins and lower costs point to a return to profit growth in
FY15.
* Reasonable revenue growth and improved margins are expected in FY15, subject
to the impact of current market conditions, particularly in the Federal Government.
* Customer demand is expected to continue for digital, cloud, mobility, information
management and core system enhancement solutions increasingly operating "as a
service".
* Customer focus on cost and value for money is resulting in Government and nonGovernment organisations increasing their use of offshore and cloud service
models.
* We see market conditions remaining challenging over FY15. However DTL has
access to a very large marketplace and the company is aiming to drive organic
growth through continued investment in DTL's solutions platform and increased
sales capacity... Overall DTL's goal is for FY15 to increase profit over FY14..
* Having taken costs and capacity out in the previous two years, the 2015 plan
targets growth through market share gain and the introduction of additional
complementary revenues. Our financial objective is to improve on the 2014 result.
* While we expect an overall improvement in FY15 following investment in practices
and partnerships, general demand remains subdued... Solid demand for Digital,
Analytics and Cloud offerings with billable headcount being added in these practice
domains nationally.
Source: Company Reports.
Margin Targets Reiterated
UXC reiterated its medium-term margin targets for each of the divisions.
Margin improvement is targeted post a focus on utilisation, cost control and resource
management. The restructuring changes in FY14 saw a reduction of 50 staff though
30 were added back in key areas for productive contracts.
Table 4: Margin Targets by Segment – Exit Rate for FY16
Consulting
Applications
Infrastructure
FY12
5.8%
10.0%
3.3%
FY13
6.0%
10.0%
4.0%
FY14
7.6%
9.8%
3.2%
FY16 exit
9-10%
11-12%
4.5-5.5%
Source: Company data.
Cash Flow and Balance Sheet
Operating cash flow impacted by seasonality
1H cash flows are usually negative due to seasonal factors affecting the timing of
receipts and the related disbursements around 30 June. Government procurement of
goods and services and certain software license sales to other customers typically
peak in May/June, which produces higher than usual collections.
Prepayments are also received in this period which creates a temporary cash surplus
in 2H which reverses in 1H as the associated disbursement to suppliers is made.
5
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Milestone collections have been ahead of terms for successful delivery on key
projects with minimal prepaid receipts.
According to company guidance, cash flow is expected to be equivalent to EBITDA
for FY15 consistent with prior years.
Net Debt decreased substantially from 1H14
Net debt decreased to A$4.1m in FY14 from A$51.9m in 1H14, equating to gearing
(ND/ND+E) of 1.9%. Net Debt to EBITDA is 0.1x and Interest Coverage
(EBITDA/Net Interest) is at 14.1x, well above the covenant of 3.5x.
Customer Sectors and Acquisition
UXC retains a large exposure to Federal and State Government though
unsurprisingly health care has increased markedly. Health care and utilities remain
key areas of focus but there is upside potential in the financial sector.
Figure 3: Customer Sector Exposure
16
14
12
10
8
6
4
2
0
%
FY13
FY14
Source: Company data.
The company has also won 17 new contracts that are between A$1-3m and 2
contracts greater than A$3m.
Acquisitions
UXC made five acquisitions in the Applications segment this year:
 Three in Australia to expand emerging growth solutions
 One in Australia/SE Asia focused on Oracle Asset Life Cycle Management
 One in North America to leverage the Microsoft Dynamics market.
We expect UXC to continue to grow in these areas through a combination of both
organic growth and further acquisitions. Of UXC’s 8% revenue growth in FY14, 1%
was organic with the remainder being derived from acquisitions. We estimate that
this equated to ~A$41m.
Cloud Applications
UXC has cloud-based practices with its partnership with ServiceNow, Apptio and
other providers. Cloud businesses now have combined revenue of over A$40m.
6
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Tectura
The integration of Tectura has progressed well and is not fully integrated. It had
minimal contribution to FY14 PBT after integration and acquisition costs but the
company has strong expectations in FY15 and beyond.
UXC is looking to make more acquisitions in this space after 6-12 months to build
the business to over US$100m.
More on these acquisitions can be found in the Appendix at the end of this note.
Divisional Analysis
Consulting (16% of FY14 normalised divisional PBT)
Revenue decreased 6% to A$84.9m but normalised PBT increased from A$5.4m to
A$6.5m driven by 2H14. PBT margins improved notably in 2H14 by 3.4ppts so that
overall the business finished the year at 7.6% PBT margin.
 The company commented that margins are still below target but with some
increased revenue anticipated in FY15, further improvements are expected.
 UXC is focusing on utilisation, cost control and resource management to this end.
Table 5: Consulting Division Earnings
Revenue
Normalised PBT
Normalised PBT Margin
PBT pre project cost overruns
PBT margin post project cost overruns
1H13
48.9
3.9
8.0%
3.9
8.0%
2H13
41.8
1.5
3.6%
1.5
3.6%
FY13
90.6
5.4
6.0%
5.4
6.0%
1H14
45.6
3.7
8.2%
3.7
8.2%
2H14
39.2
2.7
7.0%
2.7
7.0%
FY14
84.9
6.5
7.6%
6.5
7.6%
1H on 1H
-6.6%
-5.0%
0.1 ppt
-5.0%
0.1 ppt
% Change
2H on 2H
-6.0%
83.8%
3.4 ppt
83.8%
3.4 ppt
FY on FY
-6.4%
19.5%
1.6 ppt
19.5%
1.6 ppt
Source: J.P. Morgan estimates, company data.
Applications (74% of FY14 divisional PBT)
Revenue rose 15% to A$322.1m but normalised PBT increased by only 8% to
A$30.2m due to a 0.6ppt decrease in PBT margins. If we were to normalise PBT for
the project overruns, Applications PBT would have fallen by just 0.2ppts.
 Top-line growth was completely driven by acquisitions with a flat organic
revenue performance.
 The Applications segment continues to be UXC’s core growth driver and is
characterised by larger and longer duration projects providing the company with
diversification benefits.
 UXC RedRock performed strongly and UXC extended its investment in the
Oracle Portfolio to include Asset Life Cycle Management through the acquisition
of Convergence.
 The Microsoft Dynamics market accelerated in 2H14 particularly in North
America. The backlog of work is increasing and improvements in 2H14 are
expected to continue.
7
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
 UXC Oxygen, the SAP business, had a difficult year in generating satisfactory
earnings but won and successfully delivered some large and complex SAP
projects during the year. There was a slowdown in the run rate of the business
making resource allocation difficult. While revenue was satisfactory, margins
were lower than anticipated impacting PBT.
 ServiceNow contributed seven months.
Table 6: Applications Division Earnings
Revenue
Normalised PBT
Normalised PBT Margin
PBT pre project cost overruns
PBT margin post project cost overruns
1H13
139.0
12.6
9.1%
12.6
9.1%
2H13
141.9
15.4
10.8%
15.4
10.8%
FY13
280.8
28.0
10.0%
28.0
10.0%
1H14
140.7
11.6
8.2%
12.9
9.1%
2H14
181.4
18.6
10.2%
18.6
10.2%
FY14
322.1
30.2
9.4%
31.4
9.8%
1H on 1H
1.3%
-8.0%
-0.8 ppt
2.1%
0.1 ppt
% Change
2H on 2H
27.8%
20.7%
-0.6 ppt
20.7%
-0.6 ppt
FY on FY
14.7%
7.8%
-0.6 ppt
12.3%
-0.2 ppt
Source: J.P. Morgan estimates, company data.
Infrastructure (11% of FY14 divisional PBT)
FY14 revenue grew 6% to A$236.4m but PBT declined 52%. However 2H14
marked a turnaround delivering PBT of A$4.5m vs. -A$0.2m in 1H14. Similar to
Applications, however, if PBT were to be normalised for project overruns, PBT
would have decreased by only 17%.
 Experienced a solid 2H from the Queensland Hospital projects.
 The division re-signed major outsourcing clients that were ending contract terms
including Melbourne Water, Shell, Virgin Airlines, Fletcher Group and Hudson.
 Delivery of margins for the health sector projects were more closely aligned to
sold margins.
Table 7: Infrastructure Division Earnings
Revenue
Normalised PBT
Normalised PBT Margin
PBT pre project cost overruns
PBT margin post project cost overruns
Source: J.P. Morgan estimates, company data.
8
1H13
92.2
1.8
2.0%
1.8
9.1%
2H13
130.7
7.1
5.5%
7.1
10.8%
FY13
222.8
9.0
4.0%
9.0
10.0%
1H14
111.0
-0.2
-0.2%
3.0
9.1%
2H14
125.4
4.5
3.6%
4.5
10.2%
FY14
236.4
4.3
1.8%
7.5
9.8%
1H on 1H
20.4%
-109.9%
-2.1 ppt
62.1%
0.1 ppt
% Change
2H on 2H
-4.0%
-36.7%
-1.9 ppt
-36.7%
-0.6 ppt
FY on FY
6.1%
-51.6%
-2.2 ppt
-16.6%
-0.2 ppt
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Earnings Forecasts Revisions
Following the FY14 result, we have adjusted our forecasts which results in increases
to normalised NPAT of 4% in FY15E and 5% in FY16E and 5% in FY17E.
Table 8: Earnings Revisions
Year to 30 June 2015
NPAT (A$m)
Norm NPAT (A$m)
EPS (c)
Norm EPS (c)
DPS (c)
Year to 30 June 2016
NPAT (A$m)
Norm NPAT (A$m)
EPS (c)
Norm EPS (c)
DPS (c)
Year to 30 June 2017
NPAT (A$m)
Norm NPAT (A$m)
EPS (c)
Norm EPS (c)
DPS (c)
Revised
27.1
27.1
8.4
8.2
5.7
Revised
27.9
27.9
8.7
8.4
5.9
Revised
28.7
28.7
8.9
8.7
6.1
Previous
25.9
25.9
8.0
7.7
5.4
Previous
26.6
26.6
8.2
8.0
5.6
Previous
27.2
27.2
8.4
8.1
5.7
% Change
4.7%
4.7%
5.3%
5.7%
5.6%
% Change
4.8%
4.8%
5.4%
5.7%
5.4%
% Change
5.7%
5.7%
6.3%
6.6%
6.1%
Source: J.P. Morgan estimates; Company data.
Investment Thesis, Valuation and Risks
UXC Limited (Overweight; Price Target: A$1.15)
Investment Thesis
UXC has a strong relationship with each of the four key application vendors (Oracle,
SAP, Microsoft Dynamics and ServiceNow), strong balance sheet capacity and a
solid reputation and track record for delivering on large contracts. It is these strengths
that we believe will allow the company to capitalise on three key opportunities for
growth: 1) offering Microsoft AX applications in North America; 2) growth in cloudbased applications and alignment to ServiceNow; and 3) cross-selling opportunities
from applications.
Our Price Target has increased from A$1.04 to A$1.15 as a result of our upward
earnings revisions.
Valuation
 Timeframe: 30 June 2015
 Derivation: Average of DCF and SOTP valuations, rolled forward at the cost of
equity less dividends.
 Key inputs: DCF valuation: WACC 9.9%, TGR 3.0%; Compcos: 7.3x FY15E
EBITDA, which is the market-cap-weighted average of Australian peers.
Risks to Rating and Price Target
 Downside risks: Offshoring and increased competition leading to price deflation
in fixed price contracts, cost and duration overruns on contracts, staff attrition
rates increasing, rate of change of technology increasing, slowdown or deferral in
IT spending, acquisition integration risks and legal risks.
9
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Appendix: More on Acquisitions
UXC on the Front-foot with Cloud Solutions Offering
UXC has established UXC Cloud Solutions for its Applications division, which is
focused on emerging cloud-based firms including ServiceNow (NYSE: NOW US)
and Netsuite (NYSE: N US).
ServiceNow has 1,443 employees with 1,778 enterprise customers and a 94%
customer retention rate. It is taking market share in the ERP market by offering
features such as:
 A cloud-hosted delivery, SaaS platform, that is paid for via subscription
 Workflow automation, notification escalation, reporting, 3rd party integration and
administration capabilities
 On demand customisation
 Customer support
Revenue for ServiceNow is projected to grow from USD$93m in CY11 to
USD$609m in CY14, equating to a 3-year CAGR of 87% using Bloomberg
consensus figures.
Keystone Management Solutions
To aid its participation in this growth, UXC acquired Keystone Management
Solutions in November 2013. Keystone has been a preferred partner for ServiceNow
since 2007 and is an Accredited ServiceNow Training Provider with the largest
number of Certified Implementation consultants. Keystone has undertaken over 120
successful implementations of ServiceNow with over 80% of ServiceNow customers
in Australasia being Keystone customers.
UXC used to sit alongside Keystone for a number of clients where Keystone would
undertake the implementation of ServiceNow and UXC would have a Consulting
role. Now UXC will be able to offer more of the value chain.
Figure 4: Customer Base of Keystone Management Solutions
Services
BPay
Financial & Tech
NAB
RACV
Sedgman
Spotless
Intergraph
Cancer council
Tyco Fire & Security
Veda
BOQ
HBOS
Challenger
Advantedge
Fuji Xerox
CITEC
ZettaServe
Education
University of
Western Aust
Bond University
AUT University
University of Sydney
QLD Education
Griffith University
Government
Australian Sports
Commission
Gold Coast Council
Queensland Govt
Other
Tabcorp
Retail
Metcash
BlueCare
Sands Las Vegas
Thrifty
Visy
Grocon
Lonely Planet
ResMed
Campbell Brothers
Pentana Solutions
Wesfarmers
PlaceMakers
Foodstuffs
Frucor
Target
Kmart
Utility & Energy
Macquarie
Generation
Ausenco
Rio Tinto
Worley Parsons
Oil Search
Citic Pacific
Source: Company reports.
The acquisition of Keystone is expected to cost A$24-28m equating to 4.5-5.0x PBT,
depending on earnout targets. Revenue is A$27m annualised and growing at ~40%
over the past three years. UXC expects to generate revenues from license sales,
10
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
ongoing SaaS annual revenue, implementation work, customisation work and
ancillary services such as help desk. At least 30% of revenues are recurring.
There are only two implementation partners for ServiceNow in Australia and UXC is
now the only platinum partner globally. This means that UXC is entitled to bigger
discounts and more referrals than other partners.
White-Labelled
In October 2013, UXC acquired White-Labelled, a leading digital and e-commerce
specialist providing integrated digital solutions and implementation capabilities
particularly in Hybris, an SAP business, as well as Oracle commerce, Magento and
IBM WebSphere Commerce. Hybris offers an e-commerce solution with
functionality that includes merchandising, order management, product information
management, multilingual support, analytics and support for both Apple iOS and
Android devices. White Labelled generates A$6m of annualised revenues with
~A$0.5m in PBT. 15% of revenues are recurring.
This allows UXC to offer both back-end ERP solutions and front-end e-Commerce
offerings to its customers increasing the company’s ability to leverage cross-selling
opportunities. Key customers include Australia Post, Target, Harvey Norman,
Jeanswest, Terry White Chemists, Qantas, Pacific Brands, Woolworths, OneSteel,
Aesop and Sigma.
Figure 5: White Labelled and UXC combined offering
Source: Company reports.
Tectura Corporation
In December 2013, UXC acquired Tectura Corporation, an established Microsoft
Dynamics ERP and CRM partner to medium and large companies in the US and
Canada for US$21m, or 4.5-5x PBT. Currently, UXC’s North American business
consists of the acquisition of Cole Systems in December 2012, which generates
US$10m in revenues. The acquisition of Tectura increases revenues from the North
American business to ~US$70m pa, with 1,400 clients and 260 staff. UXC believes
11
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
the North American business could generate over US$100m in revenues in the next
three years, built mainly through acquisitions. It expects client retention to be 96%
and employee retention to remain above 85% from FY13 to FY16.
Convergence
Convergence is an Oracle based Asset Life Cycle Management consultancy which
was acquired in late June 2014. It has 23 consultants in Australia and Singapore and
extends UXC’s Red Rock Oracle functional capability and broadens the customer
base.
Clarity
Clarity is a niche SAP consultancy that has been integrated into UXC Oxygen. It has
12 staff which will form part of the various functional SAP practices.
12
Australia Equity Research
29 August 2014
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
UXC Limited
A$ in millions, year end Jun
Profit And Loss
Revenue
Revenue growth
COGS
Operating Expenses
EBITDA
EBITDA growth
EBITDA margin
Amortisation
Depreciation
EBIT
Other Income
Other Expenses
Net Interest
Pre-Tax Profit
Tax
Tax Rate
Minorities
Abnormals (post tax)
Reported NPAT
Normalised NPAT
Growth
End of Period Shares
EFPOWA
Relative recommendation:
FY13
598
6.9%
(561)
37
9.2%
6.2%
(4)
(4)
30
(0)
29
(8)
27.9%
0
3
24
FY14 FY15E FY16E FY17E
646
699
720
742
8.0% 8.2% 3.0% 3.0%
(610) (655) (673) (694)
36
44
47
47
(2.4%) 20.7% 7.2% 0.5%
5.6% 6.3% 6.5% 6.4%
(4)
(4)
(4)
(4)
(4)
(4)
(4)
(4)
28
37
40
40
(3)
(3)
(2)
(1)
26
34
38
39
(7)
(9)
(11)
(11)
28.8% 28.0% 28.0% 28.0%
0
0
0
0
(3)
0
0
0
16
24
27
28
21
18
24
27
6.9% (13.8%) 33.4% 11.2%
322
331
322
331
0.08
0.05 0.08 0.08
0.07
0.06 0.07 0.08
5.1% (17.0%) 32.0% 11.1%
0.09
0.08
3.0%
DPS ($)
Growth
0.06
0.04 0.05 0.06
64.3% (34.8%) 37.3% 10.7%
0.06
3.5%
DPS/EPS payout
75.6%
78.1% 70.0% 69.7% 70.1%
FY13
30
7
3
(15)
(5)
20
FY14 FY15E FY16E FY17E
28
37
40
40
8
7
7
7
(4)
1
1
1
10
(10)
0
0
(11)
(12)
(12)
(12)
31
23
36
36
Reported EPS ($)
Normalised EPS ($)
Growth
Cash Flow Statement
Net Profit for Cashflow
Depreciation & Amortisation
Non Cash Items
Working Capital Changes
Other Operating Cashflows
Cashflow from Operating Activities
309
316
321
327
322
331
28
3.0%
Capex
Net Acquisitions
Other Investing cashflows
Investing Cash Flow
(13)
(9)
0
(23)
(7)
(42)
0
(49)
(7)
0
0
(7)
(7)
0
0
(7)
(7)
0
0
(7)
Inc/(Dec) in Borrowings
Equity Issued
Dividends Paid
Other Financing Cashflows
Financing Cash Flow
8
(0)
(12)
0
(4)
15
(0)
(12)
0
3
1
0
(18)
0
(16)
(12)
0
(17)
0
(29)
(10)
0
(19)
0
(29)
(6)
(15)
(0)
0
(0)
Net Cash Flow
Valuation Summary
Current mkt capitalisation
A$m
275.67
Price Target
Capital growth to price target
Trading Multiples
PE Pre-abnormals
PE Reported
EV/EBITDA
EV/EBIT
Overweight
A$ps
0.86
1.15
33.4%
FY13
12.8
11.3
6.7
8.4
FY14 FY15E FY16E FY17E
15.4
11.7
10.5
10.2
17.9
11.7
10.5
10.2
7.7
6.4
5.7
5.5
10.0
7.7
6.8
6.5
Key Ratios
Dividend Yield
Franking
Return on Assets (%)
Return on Equity (%)
ROIC (%)
FY13 FY14 FY15E FY16E FY17E
6.7%
4.4%
6.0%
6.6%
6.9%
100.0% 100.0% 100.0% 100.0% 100.0%
5.8%
4.5%
5.7%
6.4%
6.5%
11.0%
8.8% 11.1% 11.9% 11.8%
10.9%
8.9% 10.9% 11.7% 11.8%
Leverage
Gearing (Net Debt / Equity)
Gearing (ND / (ND + E))
Net Debt / EBITDA
EBIT Interest Cover (x)
FY13
(12.8%)
(14.7%)
(69.3%)
68.7
FY14 FY15E FY16E FY17E
1.9%
2.4% (2.9%) (7.1%)
1.9%
2.3% (3.0%) (7.6%)
11.3% 11.9% (14.4%) (36.0%)
10.9
12.8
17.6
29.9
FY13
34
92
6
48
180
12
175
15
202
383
87
0
7
25
44
163
9
0
6
4
18
181
167
0
3
32
0
202
(26)
FY14 FY15E FY16E FY17E
20
20
20
20
107
97
100
103
3
3
3
3
39
46
47
49
169
165
169
174
13
13
13
13
223
222
222
222
22
22
22
22
257
257
257
257
426
422
426
431
101
87
90
92
11
25
13
3
4
5
5
6
28
29
30
32
45
45
46
47
189
190
184
180
13
0
0
0
0
0
0
0
5
6
6
6
3
4
4
4
21
9
10
10
211
200
194
190
180
180
180
180
0
(0)
(0)
0
2
2
2
2
33
39
50
59
0
0
0
0
215
222
232
241
4
5
(7)
(17)
Balance Sheet
Cash
Receivables
Investments
Inventories
Other Current Assets
Total Current Assets
Net PPE
Total Intangibles
Other Non Current Assets
Total Non Current Assets
Total Assets
Creditors
Current Borrowings
Current Tax Provisions
Other Current Provisions
Other Current Liabilities
Total Current Liabilities
Non Current Creditors
Non Current Borrowings
Deferred Tax Liabilities
Other Non Current Provisions
Other Non Current Liabilities
Total Non Current Liabilities
Total Liabilities
Equity
Other Equity
Reserves
Retained Profits
Outside Equity Interests
Total Shareholders Equity
Net Debt
Source: Company reports and J.P. Morgan estimates.
13
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
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analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
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KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
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covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing
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UXC Limited (UXC.AX, UXC AU) Price Chart
2
OW A$1.2
OW A$1.146OW A$1.036
1.5
OW A$1.159 OW A$1.023
Date
Price(A$)
1
0.5
Rating Share Price Price Target
(A$)
(A$)
20-Dec-13 OW
1.07
1.16
16-Jan-14
OW
1.06
1.15
28-Feb-14 OW
0.98
1.20
18-Jun-14
OW
0.76
1.02
29-Jul-14
OW
0.75
1.04
0
Dec
10
Sep
11
Jun
12
Mar
13
Dec
13
Sep
14
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Dec 20, 2013.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research
website, www.jpmorganmarkets.com.
Coverage Universe: Soemino, Armina: Ardent Leisure Group (AAD.AX), Breville Group Limited (BRG.AX), CSG Limited
(CSV.AX), Corporate Travel Management (CTD.AX), Domino's Pizza Enterprises Ltd (DMP.AX), Flight Centre Ltd (FLT.AX), GUD
Holdings (GUD.AX), Helloworld Ltd (HLO.AX), Retail Food Group Limited (RFG.AX), Salmat (SLM.AX), Tassal Group (TGR.AX),
UXC Limited (UXC.AX), Village Roadshow Limited (VRL.AX), Webjet Limited (WEB.AX), Wotif.com Holdings (WTF.AX)
14
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2014
J.P. Morgan Global Equity Research Coverage
IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
45%
55%
46%
75%
Neutral
(hold)
43%
49%
47%
66%
Underweight
(sell)
11%
34%
7%
54%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
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15
Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
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Armina Soemino
(61-2) 9003-8620
armina.x.soemino@jpmorgan.com
Australia Equity Research
29 August 2014
Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P
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