The Citadel Group Ltd (ASX: CGL) share price traded 2% lower today following the release of the IT services company's half-year report. Here are the key takeaways.
- Revenue from continuing operations up 6.4% to $44.1 million
- Revenue down 3.5% to $46 million
- Net profit after tax (NPAT) from continuing operations attributable to members up 9.4% to $5 million
- NPAT attributable to members down 33.8% to $3.7 million
- Earnings-per-share (EPS) from continuing operations attributable to members up 8% to 10.7 cents
- 8 cent fully-franked interim dividend down from 5.8 cents last year
During the period, Citadel divested its vocational training subsidiary, Australian Business Academy Pty Ltd, due to adverse regulatory changes impacting profitability. Profits from continuing operations exclude the loss from this business and so are a more relevant indication of business performance as opposed to overall profits.
However, the crucial number for assessing Citadel's performance is EPS from continuing operations attributable to members. Not only does this exclude the impact of Australian Business Academy Pty Ltd, but it also filters out group profits which are not attributable to shareholders. Furthermore, it accounts for a roughly $5 million increase in shareholder equity used to partially pay for Kapish Pty Ltd and Kapish Services Pty Ltd ("Kapish") which Citadel acquired on 1 July 2016.
It is important to note that only profits attributable to shareholders are relevant. Citadel recorded NPAT attributable to non-controlling interests of $1.7 million in the half compared to nothing last year and this should be excluded to understand Citadel's underlying business performance.
The amount relates to filosoph-e Pty Ltd which became a subsidiary of the group on 1 April 2016 after Citadel acquired a further 25% interest, taking Citadel's total ownership to 50%. The $1.7 million effectively represents the 50% of filosoph-e profits that do not belong to Citadel.
All things being equal you would expect that an additional 25% contribution from filosoph-e Pty Ltd and almost a full-period contribution from Kapish would have boosted Citadel's NPAT.
Indeed in the notes to the accounts it states: "Included in the profit after tax for the half-year is $1.7 million attributable to the additional business generated by Kapish (2015: Nil)."
Whilst group NPAT from continuing operations and attributable to members was higher, it was only modestly up 9.4% or $0.4 million and so organic profits went backwards by at least $1 million.
Citadel's balance sheet deteriorated during the half, thanks largely to cash payments for acquisitions totalling $20.4 million. Cash after adjusting for debt fell from $33.3 million at 30 June 2016 to $8.7 million at 31 December 2016.
Foolish takeaway
Citadel delivers large multi-year contracts primarily to the public sector and so profits can be lumpy. Therefore, if organic profits fell compared to the prior period this does not necessarily indicate that the business is struggling. On the other hand, perhaps the decision of the board to reduce dividends hints to the contrary.
The stock trades on a historical price-to-earnings ratio (PER) of 29 which to me seems like a lot for this type of business. I have owned Citadel previously but sold when the company's full-year 2016 results came in way below my expectations. That meant that the stock was priced far more expensively than I had previously thought and based on today's report it still looks too expensive in my opinion.
