The Citadel Group Ltd (ASX: CGL) share price will be one to watch when it returns from its trading halt.
Why is the Citadel share price in a trading halt?
On Tuesday the software and services company requested a trading halt following the release of its half year results and the announcement of a major new acquisition.
In respect to its results, in the first half of FY 2020 Citadel reported a 24.4% increase in revenue to $61.1 million. This was driven by a 18.9% lift in software revenue to $18.9 million and a 25% jump in services revenue to $41.5 million.
But due to the narrowing of its gross profit margin to 41.2%, gross profit grew only 8.2% to $25.2 million. Management advised that this reflects the shift towards recurring software revenues that have lower margins than managed services contracts but longer durations. It was also impacted by the acquisition of Noventus, which operates on much lower margins.
This ultimately led to a 5.3% decline in half year EBITDA to $12.5 million. Despite this, the board has held firm with its interim dividend of 4.8 cents per share fully franked.
Citadel’s CEO Mark McConnell said: “Our strategic focus is to drive a shift in the business mix to increase the proportion of revenue and earnings from our Software segment, to provide long term recurring revenue streams. Our first half result reflects our dedication to growing our Software segment, as well as the successful integration of Noventus, which is performing above our expectations.”
Citadel also announced that it has entered into a binding agreement to acquire Wellbeing Software Group for an enterprise value of £103 million ($200 million). Wellbeing is the UK market leading provider of radiology and maternity software solutions that manage patient workflow and data.
Management believes the acquisition is in line with its strategy of further expanding into high quality software based recurring revenue streams, and shifts Citadel’s overall earnings profile towards healthcare software.
It generated £16.6 million revenue for the 12 months ended December 31 2019 and is forecast to generate £18.7 million revenue this calendar year. In 2019 it delivered a gross profit of £10.1 million, and EBITDA of £6.5 million at a 39% margin.
Management expects the acquisition to deliver high single digit percentage earnings per share accretion (including cost synergies). It also offers the opportunity to generate substantial additional accretion from cross-sell revenues in Australia and the UK.
In order to fund the deal, the company has launched an underwritten two-tranche placement to raise approximately $127 million at $4.65 per new share. This will be supported by a $90 million debt facility.
Mr McConnell said: “Citadel’s acquisition of Wellbeing transforms Citadel into a global healthcare software company with multiple growth opportunities. Citadel has been focused on growing in the healthcare software sector in the UK over the past two years. I am excited to welcome Wellbeing’s management team into Citadel and am looking forward to executing on the many growth opportunities we see for the combined businesses.”
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Citadel Group Ltd. 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.