Director buys can be a sign that those with the most insight into a company view its shares as undervalued. Here we take a look at an ASX tech share with multiple director buys over the past week.
What is insider buying?
Insider buying is the purchase of shares in a company by an officer or executive of that company, such as a director. Insiders usually have exclusive insights into the companies they manage and are likely to purchase shares when they view them as undervalued.
Insiders must only buy based on publicly available information and must inform the ASX of the trade by lodging an Appendix 3Y. Depending on the circumstances, the purchase by an insider of shares can be seen as a vote of confidence in a business. Buys by multiple insiders can act as a stronger signal, as can larger, rather than smaller, share purchases.
Which ASX share had director buys?
We have studied insider buys for February to bring you an ASX tech share with multiple insider buys this month: Citadel Group Ltd (ASX: CGL).
Three Citadel directors acquired an aggregate of 122,100 shares in the company last week.
Citadel Group is a software and technology company that specialises in secure enterprise information management. Citadel provides secure information to support real-time decisions in health, defence, national security, and other industries.
The Citadel share price fell sharply on Wednesday following the release of the company’s half-year results and the announcement of an acquisition and capital raising. Shares dropped 23% from $5.86 on Monday to a low of $4.50 on Wednesday following the announcements. Citadel shares are currently trading at $4.67.
The share placement raised $127 million which will be used to fund the purchase of the Wellbeing Software Group. The Wellbeing Group is a U.K. provider of radiology and maternity software solutions that manage patient workflow and data. Wellbeing will sit within the Citadel Health division and augment Citadel’s current pathology and oncology software products.
The acquisition is expected to deliver high single digit percentage earnings per share accretion (including cost synergies) with the opportunity to generate substantial additional accretion from cross-sell revenues in Australia. The acquisition also shifts Citadel’s overall earnings profile towards healthcare software.
Consideration for the purchase is $198 million comprising $9 million in Citadel shares and $189 million in cash. This will be funded by proceeds from the share placement and a $90 million debt facility.
Citadel CEO Mark McConnell said, “Citadel’s acquisition of Wellbeing transforms Citadel into a global healthcare software company with multiple growth opportunities.”
Citadel’s half-year FY20 results
Citadel also delivered its half-year results last week, reporting a 24.4% increase in total revenue, up to $61.1 million. Gross profit increased 8.2% to $25.2 million, up from $23.3 million in 1H19. Gross margin declined to 41.2% from 47.5%, reflecting the shift towards recurring software revenues that have lower margins than managed services contracts but longer durations.
Earnings before interest, tax, depreciation and amortisation (EBITDA) declined 5.3% to $12.5 million, including $0.8 million of abnormal restructure and one-off expenses. Citadel declared an interim dividend of 4.8 cents, fully franked, flat on the prior corresponding period.
While a single director buy may not be telling, several can provide a good indication that those best placed to know consider shares good value.