Straker Translations (STG) | Stockpiling acquisition ammunition
Solid March quarter: [All amounts in NZ$m] STG’s recent March quarter 4C statement showed good performance, with receipts from customers of $6.8m (+7.7% on December quarter) and net operating cash outflow of -$0.3m. Overall cash outflows were -$1.2m, including development costs of -$0.3m and restructuring costs of -$0.2m, along with 7 weeks of NZTC International. STG’s cash balance was $11.2m at 31 March, down from $12.4m as at 31 December.
COVID-19 operational impact muted: STG’s operational model, which uses remote, crowd-sourced translator resources (which are a variable cost) and a centralised, cloud-based platform, has meant that disruption has been minimal. STG will also benefit from c.$0.6m of government stimulus support ($0.4m has been received in New Zealand). An increased focus on costs has delivered short- and long-term savings, estimated at just over $3m annualised.
Demand impact mixed: COVID-19 impacted sales from mid-March, with orders c.7% below the pcp. As this includes the benefit of acquisitions (On Global and NZTC), the underlying reduction will be greater (our rough calculation suggests c.20%). STG has also seen increased interest from enterprise clients seeking to consolidate and reduce translation costs in response to COVID-19, which has offset some of the impact. STG is now running a digital marketing campaign highlighting its cost and capability advantages versus their competitors.
M&A strategy paused: STG has temporarily paused its plan to strategically acquire translation businesses due to market uncertainty. The company is currently integrating NZTC International (purchased in February) and believes that the current economic situation will throw up plenty of opportunities to acquire good businesses at lower multiples when conditions improve.
Forecast changes/Investment view: We have incorporated a COVID revenue impact (25% reduction for 6 months), which is mostly offset by the inclusion of NZTC. The negative EBITDA impact is around -$1m in FY20 and FY21, falling to ‑$0.6m in FY22. We believe STG is well placed to weather the COVID-19 storm and accelerate its growth plans through adding enterprise clients and strategic acquisitions as conditions improve. Our updated valuation and 12-month price target is $1.44 (from $1.92). BUY maintained. Click here to read full report