The Citadel Group Ltd (ASX: CGL) share price has climbed 17% higher since Christmas time. Can it continue to rebound?
Entities are generating increasing amounts of data. Some of which needs to be stored and shared securely. As per the company's website, Citadel "specialises in secure enterprise information management in complex environments. Citadel provides secure information to support real-time decisions across the Health, National Security, Defence and Other Enterprises". One way that Citadel currently does this is through Citadel-Information Exchange (Citadel-IX), its cloud-based enterprise information management platform.
Predominantly servicing the government sector often means that Citadel signs multi-year contracts with its clients. This should generate predictable and reliable cash flow in the near term. To 30 June 2018, Citadel increased revenue 10%, to $108.5 million and increased earnings per share by 35%, to 32.5 cents. We will get a chance to see the company's interim 2019 numbers on the 18th of February when Citadel releases its half-year results.
Why has the Citadel share price been rising?
Citadel finalised the acquisition of government SaaS business Gruden Pty Ltd on 12 December 2018. The company may take some time to digest the acquisition, however, Citadel believes that Gruden can "provide valuable new SaaS platform capabilities and panel arrangements". As a cash-based transaction, there will be an immediate impact to Citadel's earnings.
Citadel currently trades at 22x forward earnings. This is above the market average of 16/17x earnings, however, this isn't unexpected given the company operates in the SaaS space. As a bonus, the company also has a small dividend, yielding 1.8% plus franking credits.
Foolish Takeaway
I believe that the market threw this baby out with the bath water. As highlighted by the recent Gruden acquisition, Citadel is focussed on growing as a software business. If successful, the strong economics of this strategy should help to grow earnings over time.
The Citadel share price is trading 0.36% higher at $8.26 at lunchtime on Tuesday.
