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ARQ Group Ltd (ASX:ARQ) shares plunge 31% on half year report

Earlier today ARQ Group Ltd (ASX: ARQ), formerly Melbourne IT, reported its half year result for the six months to 30 June 2018 showing a 23.5% increase of revenue to $112.4 million. The 2017 financials have been restated for the adoption of new accounting standards.

The Enterprises Services (ES) segment saw 39% revenue growth with some large customer wins like Anglo American, Aurecon, Bunnings, Eclipx, Linfox and Pfizer. Pleasingly, ES digital solutions revenue grew by 42%.

ES saw earnings before interest, tax, depreciation and amortisation (EBITDA) grow by 111.3% to $13.1 million. The underlying EBITDA margin improved by 760 basis points to 22%.

The Small & Medium Business (SMB) segment reported revenue growth of 8.7%, although organic growth was down 9.9% due to legacy components contracting after taking into account the pro forma contribution of WME Group. On the positive side SMB digital solutions revenue grew by 133%.

SMB EBTIDA declined by 6.7% to $8.4 million and the underlying EBITDA margin contracted 560 basis points to 18.1%.

ARQ’s total statutory EBITDA fell 43.7% to $8.5 million due to a $5.5 million loss on reassessment of contingent consideration liability in relation to InfoReady, $1.6 million relating to integration costs, $2.2 million for branding costs and other small items.

Statutory net profit after tax (NPAT) was a loss of $2.7 million compared to last year’s profit of $7.7 million. This was due to the above-mentioned one-off costs and accelerated amortisation of the WebCentral brand and higher depreciation due to office moves.

Underlying earnings per share (EPS) grew by 16.7% to 7.7 cents whilst statutory EPS was a loss of 2.27 cents.

At the end of the half-year net debt stood at $59.5 million, a fairly comfortable 1.5x underlying EBITDA. Management expect that moderate leverage to continue.

The dividend was maintained at 3.5 cents per share, fully franked. ARQ’s dividend policy is to pay dividends of 55% to 75% of underlying net profit after tax to shareholders.

Outlook

Management expect that ES revenue will generate organic growth of 10% to 20% in FY19 and then achieve growth at an average of 15% to 20% per annum thereafter. The underlying EBITDA margin is likely to dip in the short-term before returning to 20% by 2020.

SMB revenue may be muted in the short-term, with revenue growth of 0% to 5% in FY19 but steadily increasing in the future. Management expect the underlying EBITDA margin to climb towards 20% by FY20.

ARQ believes that Group underlying EBITDA will be between $37 million to $39 million in FY18 and expects growth of between 7% to 15% in FY19.

Foolish takeaway

The loss has clearly disappointed the market, full-year guidance has also been reduced with underlying EBITDA of $41.5 million to $45.5 million for the full year downgraded to EBITDA in the $37 million to $39 million range.

It currently offers a grossed-up dividend yield of 4.7% at the current share price and is projecting solid growth in the longer-term. At the current price I think interested watchers of this business should have a closer look. However, it’s outside of my circle of competence so I’m leaving it off my watchlist for now.

Instead, I’d much rather buy shares of this top business which just grew profit by 30% and is predicting more good times ahead.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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