Crimsonwing plc last week published its financial statements for the six months ended September 30. Overall revenue across the group grew by 12 per cent to a record figure of €8.68 million. It stemmed mainly from new licence sales particularly related to the Microsoft Dynamics solutions across the business units in the UK and the Netherlands (Promentum). Earnings before interest, tax, depreciation and amortisation (EBITDA) surged to €0.86 million from €0.31 million in the previous comparative period as Crimsonwing started to benefit from the significant restructuring that took place in the Netherlands in recent years.
Market participants and investors require clarity- Edward Rizzo
Crimsonwing’s chief executive officer David Walsh had indicated that the reduced costs from the lower number of employees and the new rental agreement in the Netherlands will start to show up from the current financial year which runs through March 31, 2013, and the performance in the first half is proof of this.
More importantly, Crimsonwing generated pre-tax profits amounting to €0.55 million, which is a record level for the first six months of their financial year.
In the half-year report, the directors provided substantial details of the performance across all business units. From the review of operations, it is highly evident that the four new international contracts which were the subject of a company announcement last month did not begin to filter through the financial performance during H1. Therefore, shareholders should look forward to further profitability growth in the short term.
On October 25, Crimsonwing issued an announcement confirming the new major international contracts that had been awarded to the group and which had been mentioned in an online interview with the CEO a few days before. Earlier this year, Crimsonwing UK was selected by Mothercare plc as its strategic partner for providing a global e-commerce roll-out across 50 countries. This could translate into a maximum of 100 e-commerce sites across Mothercare’s international franchisees.
In last week’s half-year report, the company revealed that the first installations are planned in early 2013 in Australia and New Zealand. Apart from receiving an initial fee for each site deployed across the world, Crimsonwing will also be responsible to manage a round-the-clock support capability from its Malta base which will translate into new recurring income for the group. Last week, Crimsonwing emphasised that the real financial benefits from this contract will start showing up in 2013 with “a strong build of annuity revenues”.
Similarly, the €2 million services contract awarded to Crimsonwing Promentum in the Netherlands from Mastermate (the wholesaler for construction-related businesses) started in September and is expected to be completed over a two-year period.
The announcement and media interview in October also referred to the contract between Crimsonwing Netherlands and the Carlson Rezidor Hotel Group (a global hospitality company owning a number of hotel brands including Radisson) for the running and enhancement of its e-commerce procurement systems for purchases handling. This is reportedly a multi-year contract which also will begin to filter through the financial statements of Crimsonwing during the current financial year.
In the October announcement, reference was also made to ongoing talks between Crimsonwing UK and the Westfield Group which owns and operates a portfolio of shopping centres around the world, including Australia, New Zealand, the US, the United Kingdom and Brazil. Crimsonwing’s chief executive officer had explained that it is in discussions to develop a global solution to help the company manage its 120 properties around the world. Westfield have already given the go-ahead to Crimsonwing to further develop the UK solution which would cater for the shopping centre at Shepherd’s Bush in West London comprising 450 shops.
Additionally, the last week’s report also makes reference to other long-term contracts which were also awarded to the business units in the UK and Promentum in the Netherlands. Moreover, the Malta business has also reportedly contracted “some major local wins both on Dynamics and eCommerce clients”. No further details on the size of these contracts were disclosed.
The announcement and interview published in October were very well received by investors resulting in an increase in stock exchange trading activity with the share price rallying strongly from the very low levels reached earlier this year. While the disclosure of the four new contracts was important news for the investing public, the major change in sentiment possibly occurred as a result of the statement made by the CEO that the Crimsonwing Group is currently in the second year of a three-year plan with the aim of reaching €20 million in turnover and €2 million in pre-tax profits by the financial year ending March 31, 2014.
This is possibly the first time ever for a company listed on the Malta Stock Exchange to issue a profit forecast. The encouraging level of stock market activity that has taken place following the announcement should encourage other companies to replicate Crimsonwing’s commendable initiative and also start providing such guidance to the market with forecasts of some key financial highlights. This is common practice across international financial markets and, while locally listed companies may initially feel that this would be risky given the uncertain nature of their business or the volatility in performance arising from the challenging economic conditions, conservative forecasts may still be issued to provide adequate guidance to the market.
At times, some local companies comment in their interim directors’ statements that they are performing within their budget without the public knowing whether that budget refers to an improving or a worsening performance over the previous year! Market participants and investors require clarity. Such guidance normally translates into an increased level of trading activity in a company’s shares or bonds which is a key ingredient for an efficient and liquid capital market.
The Crimsonwing September 2012 interim financial statements and the new contracts in the pipeline provide clear evidence that the group made good progress in approaching its profitability target of €2 million for the next financial year to March 31, 2014. A key financial indicator worth highlighting is the margin of pre-tax profits compared to turnover. The pre-tax profits of €550,000 for the first half of this year represent a margin of around 6.5 per cent of the top line figure of €8.65 million.
On the basis of a €20 million revenue forecast, this margin needs to improve to 10 per cent for the group to achieve its short-term targets. As such, investors eagerly await some further clarification from the CEO whether the new international contracts coming on stream would be sufficient for the group to achieve this higher margin.
The renewed profitable position of Crimsonwing and the sharp recovery in the share price has been very well received by shareholders who had enthusiastically supported the company when the initial public offering was launched exactly five years ago at a price of €0.50 per share.
After seeing the company experience some very difficult times caused by the international economic recession, the downturn in the value of sterling, and the serious challenges faced in the Netherlands, shareholders are now looking forward to the company achieving its profitability targets, paying a dividend and finally also seeing the share price moving upwards from the IPO level, hopefully in the not too distant future.
Following such a positive change in sentiment towards the group, Crimsonwing now needs to ensure that regular communication continues to take place to assist shareholders and prospective new investors to remain adequately informed of the company’s financial performance going forward.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.
The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2012 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.