Espreon (EON)

[tommy]

Here is an undervalued tech firm with markep cap of 57 million and PE of 11, which may suit people who don't mind illiquidity.

Espreon Ltd (EON) (formerly Legalco Ltd) is a service provider to organisations in the financial and professional services sectors. The company provides various support services including cost management and recovery solutions, settlement/exchange services on property transactions and company/trust secretarial services.

Espreon�fs business segments are:
"Cost Recovery
Espreon delivers software and hardware cost management solutions to the
professional services sector in Australia, North America and the UK, via Billback.
With solutions catering for print, copy, fax, scan, telephony and miscellaneous third party expenses, combined with an enviable reputation for customer support, Billback services 43 of the top 50 law firms in Australia.

Corporate Services
Espreon is one of Australia�fs leading providers of documentation to the financial services sector for company formations, self managed super fund trust deeds, discretionary and unit trust deeds. We supply more company formation documents than any other single provider and offer complementary company secretarial services.

Property Services
Espreon is a major supplier to almost all of Australia�fs top banks and the majority of top 200 law firms, for mortgage settlement, stamping and registration, information brokerage and property enquiries. Our information brokerage services include land title searches, company and business searches, and bankruptcy searches."

Here is the rundown:

- Gross revenue increased by 25% from $64.3M to $80.4M (>$120M annualised)
- Gross margin increased by 84% from $17.8M to $32.7M (20% derived from
overseas)
- EBITDA increased by 157% from $3.2M to $8.3M
- EBIT increased by 218% from $1.9M to $6.2M
- NPAT increased by 114% from $1.8M to $3.9M
- Basic EPS increased from 4.5c to 4.7c
- Cash from Operations per share was 6.2c, whilst No. of shares more than doubled (up 107%)
- Threefold growth in Net Assets
- 1:1 rights issue at $0.63 raised $26M to acquire Billback Systems
- Increased bank borrowings in June by $26M to acquire Lawpoint

- Strategic acquisition for growth: Billback Systems in September 2005, to strengthen position as a service provider in the domestic legal sector and to access international growth opportunities
- Strategic acquisition to reduce systemic risk: Lawpoint in June 2006, establishing Espreon as the single leading provider of property settlements and title searching in Australia
- Strategic acquisitions to improve the geographic spread of our national market share and win business in the financial planning sector: three small acquisitions in Corporate Services
- Expanded Board�fs capabilities, new general managers for each business unit, new sales team for North America
- New Property Settlement and Corporate Formations platforms went live

- Billback Systems is a leading provider of cost management and cost recovery solutions to professional services firms worldwide.
Acquisition completed on 15 September 2005
* Continued growth in all of its markets:
* More than 900 clients in Australia, 43 of the top 50 law firms
* 82 clients in North America, 24 of the top 200 law firms
* 20 clients in the UK, 5 of the top 20 law firms
* North American results below expectations due to change in ownership and bedding down the sales team
* Strongest sales results in the history of the business in May-June�f06
* $3.5M in contracted work to hand at 30 June 2006

So, in a nutshell, it is a rapidly growing company that seems to be undervalued at the current price levels, but do note that borrowings have increased (and thus increased interest payments) due to the acquisition, which I see as an excellent move. Also, shares on issue have increased last year.

Please do your own research!

Preliminary Final Report & Full Year Accounts
http://sa.iguana2.com/cache/2797fcf60c41b62b6595d652c9221ec8/ASX-EON-424041.pdf

Investor Presentat

[tommy]

EON creeping up despite low volumes, looks like downtrend has been reversed:

http://bigcharts.marketwatch.com/javachart/javachart.asp?symb=AU%3Aeon&draw.x=0&draw.y=0

[OneUp]

Hi Tommy, I was having a look through a microcap review and stumbled across EON a couple of days ago. Was going to start a thread but you've beaten me to it!

A couple of things mate.

First is that EON made $3.9m last year. So it's got a PE of 15. This is high for a company with low liquidity and high gearing IMO.

Second is that Billback operates in a very different market segment to Corporate Services and Property Services,. While all three divisions are the biggest in their markets, Property and Corporate earn low margins, and may be squeezed by the apparent business and property downturn (and they can't be described as tech, really). IMO Billback has a very bright future indeed - and I wish I could invest solely in this unit. NPBT margins are about 40% - the highest I've ever come across. And its built up a 70% market share. That's formidable. With good management they should continue to make inroads overseas.

But ofcourse all of Billback's growth was under prior management. There's no evidence that EON management can deliver similar results (tho some execs from Billback have stayed on). Infact, they seriously underperformed in the last year. EON management has to get some runs on the board. The excuses made for the poor performance were weak.

I think 1H will be OK but will be affected by integration costs with Lawpoint, 2H should be good to good, depending ofcourse on whether management deliver.

Very highly geared so I think a historic PE of 15 is too high going into a property services / corporate downturn.

I reckon EON is well worth keeping on the radar but prefer a 'wait and see' approach for now. If things turn ugly, nearly impossible to wiggle out of it with any decent sized holding.

My $0.02

[tommy]

Thanx for your analysis Oneup, very good points you have made there.

Agree with you that EON 's key to growth lies in Billback, but I presume the management will diversify risks associated with corporate/property services through further acquisitions to consolidate their market leader status.

Sitting on a quick 30% paper profit already [:p] so it's tempting to collect some profits[:I]

[OneUp]

Hi Tommy,

EON cannot afford any more acquisitions. Way too much debt. Their priority has to be to pay for all the acquisitions made in the last year to reduce this debt burden. Would not be shocked to see a rights issue.

[tommy]

quote:Originally posted by OneUp

Hi Tommy,

EON cannot afford any more acquisitions. Way too much debt. Their priority has to be to pay for all the acquisitions made in the last year to reduce this debt burden. Would not be shocked to see a rights issue.




Damn, forgot about all that debt[B)] You're right, it might be another PGA scenario but PGA didn't get punished for that did they... mmm, need to analyze deeper on this. Cheers for reminding me mate[:I]

[tommy]

hehehe EON continues to rise, hope I'm not the only one making easy money here[:p]

http://bigcharts.marketwatch.com/javachart/javachart.asp?symb=AU%3Aeon&draw.x=0&draw.y=0

[OneUp]

Hi Tommy, yeah up to $0.71.

I think you might be the only one making some dosh.

It's so illiquid. No worthwhile volumes until the mid 70s.

Think I'll continue to sit on my hands and wait for when the time is right.

Have you come across any news cf the property sector downturn?

The annoying thing about EON is that Backbill probably would have floated on its own account if it had not been bought by EON for "diversification".

[tommy]

Hi oneup,

I don't mind illiquidity that much as long as I lock in profits (that way I sleep better at night[:I])

Property downturn? err... I have idea.

I had no intention of holding EON in the long run in the first place (I was just wanted a quickie, hehehe) so it wasn't a bad place to park my cash for a few weeks, definitely better than an online bank account!

Now I'm wondering where I should put my cash... already have a bucket load of ISS, ITE, RFG, PBA and ADA so don't want to top up, I'm quiet interested in ELX at the moment (haven't bought yet though) Are there any bargains around?

[OneUp]

Altium (ALU) might be of interest.

[tommy]

quote:Originally posted by OneUp

Altium (ALU) might be of interest.


Thanx mate, will check it out[8D] Keep up da good work!

[tommy]

Sudden increase in trading volume of EON shares today, so I decided to buy back in for potential quick gains... only problem is illiquidity, so it might be a risk but hey, could be worth da punt[:I] Please do your own research!

Here is da chart:

http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=AU%3Aeon&draw.x=0&draw.y=0

Spike could be due to the recent anouncement of "double-digit EPS growth forecast"?

Results of AGM
http://sa.iguana2.com/cache/ad82aa90018eade876f887ac6358f764/ASX-EON-432874.pdf

Chairman's & MD's Address to Shareholders
http://sa.iguana2.com/cache/1f680fee0df905fc72fa9bfccab3e00f/ASX-EON-432870.pdf

"OUTLOOK

The integration of Lawpoint represented a substantial risk to our business and financial performance in 2007. With this task complete we can continue to focus our resources on improving the quality of our products and services whilst driving further improvements to operational efficiency in our property business.

In general, we would like to provide the following comments regarding the outlook for the group:
* Overall we expect the number of property transactions to remain flat or decline in the near term. However, the progressive deployment of incremental contracts for existing banking clients should provide some revenue growth in 2007, with an increased impact in 2008 due to the annualised effect of this new business
* We are seeking future growth and partnership opportunities with related suppliers involved in the conveyancing and lending process, in order to leverage our leadership position in the property segment
* Our Corporate Services business should enjoy some growth in operating profit due to the annualised impact of the small acquisitions made last year
* Billback is continuing to grow its business within all of the markets that it competes.

The challenge for Billback is to accelerate its rate of growth, particularly in North America where we still require additional or complimentary distribution options.

In terms of financial performance, we anticipate significant growth in EBITDA. Against this forecast growth, the following factors must be taken into consideration:
* Our earnings will be subject to the full tax rate for the first time
* Our interest expense will be in excess of $3M
* The number of ordinary shares on issue have increased by more than 10 million
* Our transactional business, Property Services and Corporate Services, are subject to systemic risks such as legislative change or a decline in the overall market activity. Further interest rate increases may also be cause for concern.
* Consistent with previous years, we expect our financial results in the second half to be significantly better than the first.

Notwithstanding the comments above, Espreon�fs future prospects have been significantly enhanced and we do expect double-digit growth in earnings per share for the 2007 financial year.

[OneUp]

Hi Tommy, top brass mentioned that an increase in interest rates could hit corporate services and property services.

How much is the $64k question for me.

If they can manage to tread water then EON is a good buy, given the stellar growth in Backbill.

[tommy]

quote:Originally posted by OneUp

Hi Tommy, top brass mentioned that an increase in interest rates could hit corporate services and property services.

How much is the $64k question for me.

If they can manage to tread water then EON is a good buy, given the stellar growth in Backbill.




Thanks for your opinion oneup, appreciate your comments as always!

As for EON, I'm only in it for the short-term... I think market correction is overdue now. Hopefully the increase in trading volume is sign of something positive in the works (like recent turnaround of JUM!)

[tommy]

Revenues from ordinary activities Up 90.6% to 67,694

Profit/(loss) from ordinary activities after tax attributable to
members Up 69.2% to 1,166

Profit/(loss) for the period attributable to members Up 69.2% to 1,166

Dividends (distributions)
Amount per security Franked amount per security
Interim dividend N/A �‘ N/A �‘
Final dividend N/A �‘ N/A �‘

Record date for determining entitlements to the dividend N/A

The Group experienced an increase in both revenue and profits during the half year against the previous corresponding half year.

Revenue for the half year was $67.7 million (2005: $35.5 million) representing an increase of 91%, which was driven by the full period effects of acquisitions in prior periods and organic growth.
Earnings before interest and tax (EBIT) for the half year was $3.4 million (2005: $1.3million), an increase of 161% reflecting the growth in revenues and lower relative costs from improved operational efficiencies.

Consolidated net profit for the half year was $1.2 million (2005: $0.7million) and earnings per share was 1.25 cents (2005: 0.95 cents) up 69% and 32% respectively on the previous corresponding half year. The increases in net profit and earnings per share reflect the growth in EBIT, partially offset by higher interest costs arising from the financing of acquisitions in June 2006 and a full tax expense after utilisation of prior period tax losses.

For information on net tangible asset backing refer to Note 10 of the financial statements.

[tommy]

Massive volumes two days in a row (crossed) causing a spike, what's up at good ol' espreon? Need to keep an eye on this one.

http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=AU%3Aeon&draw.x=0&draw.y=0

[OneUp]

Hi Tommy,

1H result was poor, so not too keen on EON at the mo.

Billiback most disappointing of all.

[tommy]

quote:Originally posted by OneUp

Hi Tommy,

1H result was poor, so not too keen on EON at the mo.

Billiback most disappointing of all.


Hi oneup,

Yeah, Billback underperformed due to rising costs but other two divisions weren't too bad, second half should be better. Haven't bought any EON but wondering whether there is an opportunity for a "quickie" profit on this one looking at the sudden rise in volume[}:)]