Catapult Group International - Morgans

Technology - Others│Australia│Equity research│March 26, 2018

Catapult Group International Go early, go hard

ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:

A$1.18 A$1.76 A$2.02 49.3% CAT.AX CAT AU US$153.3m A$198.4m US$0.67m A$0.85m 191.4m 38.4%

Average daily turnover: Current shares o/s Free float: Key changes in this note FY19F EPS down by 333%. FY20F EPS down by 57%. FY21F EPS down by 28%. Price Close

Relative to S&P/ASX 200 (RHS)

2.40

112

1.90

87

1.40

62

0.90 8

37

6

Vol m

4 2 Mar-17

Jun-17

Sep-17

Dec-17

■ Catapult yesterday announced an A$25m equity raising, with the funds to be used to expand the long run rate of revenue growth through higher investment in sales and marketing and technology.

■ The accelerated level of investment will result in higher operating losses, especially in FY19 and FY20, but should lead to a more robust business in the long run.

■ We have reduced our earnings forecasts and valuation. Our DCF valuation, which sets our price target, falls to A$1.76 (from A$2.02).

■ We maintain an ADD recommendation (high risk).

Funding for certainty Catapult’s greatly expanded FY19 and FY20 invest-for-growth plan will materially increase short-term losses. However, we expect the “go early, go hard” strategy Catapult unveiled today will minimise risk and increase certainty, making it possible to be on the front foot of sales opportunities and deprive competitors of oxygen. Without capital constraints, Catapult can chase growth without looking anxiously towards its next quarterly cash flow report. Assuming the new CEO’s plan of expanding international sales and service staff more than 30% pays off, revenue growth momentum should return to former levels.

Changes to forecasts, valuation The new investment spending plan has had a detrimental impact on our earnings forecasts, mostly in FY19 and FY20. Our EBITDA forecasts fall by A$13.6m in FY19 and by A$7m in FY20, but the pain diminishes thereafter. Our DCF valuation – which sets our price target – falls to A$1.76 per share (from A$2.02 per share).

Risks and catalysts

Source: Bloomberg

T (61) 3 9947 4182

Risks to Catapult’s near-term revenues and share price include: 1) failure to secure major league-wide deals; 2) new team-based contract signings fall short of expectations; 3) further operating cost blow-outs; and 4) irrational competitor behaviour or a major league-wide deal by a competitor with negative implications for Catapult. Potential nearterm re-rating catalysts for Catapult include: 1) winning one or more significant leaguewide subscription deals; 2) better-than-expected team-based subscription sales; 3) better-than-expected cost controls; and 4) loss of a major client by a close rival.

E [email protected]

Investment view

Price performance Absolute (%) Relative (%)

1M -10.3 -6.8

Ivor RIES

3M 12M -27.2 -50.4 -22.6 -51.8

Catapult’s closing share price prior to yesterday’s deal was substantially below our revised valuation and we therefore retain an ADD recommendation. As Catapult has not yet become self-sustaining from a cash flow view, the stock is high risk.

Financial Summary Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x)

Jun-17A 60.8 2.99 -13.58 (0.018) (36%) NA 0% 62 NA (11.2%) 1.73 (4.9%)

Jun-18F 76.1 0.19 -18.09 (0.041) 124% NA 0% 1,023 NA (22.3%) 1.78 (6.6%) 12% 0.63

Jun-19F 100.7 -1.84 -18.55 (0.053) 28% NA 0% NA NA (12.8%) 2.03 (8.5%) (333%) 5.89

Jun-20F 130.6 17.57 -0.22 0.040 29.79 0% 12 40.16 (17.4%) 1.98 6.7% (57%) 0.86

Jun-21F 159.4 32.50 10.79 0.097 145% 12.15 0% 6 11.70 (30.1%) 1.73 15.2% (28%)

SOURCE: MORGANS, COMPANY REPORTS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Figure 1: Financial summary ASX Code Issued shares (m) Market Capital (A$m)

CAT Share Price A$ 191.4 Recommendation: 226 Valuation: Price Target: TSR:

Key Financials Reported NPAT Normalised NPAT EPS - reported EPS - normalised EPS Growth EPS - diluted Dividend per share Payout Ratio Franking

Pricing Multiples Normalised PER Diluted PER Market PER (*) PER Relative EV/EBITDA EV/EBIT Price/Book Yield

2017 -13.6 -3.1 -8.1 -1.8 0 0% -

2017 -

2018F -18.1 -7.9 -9.5 -4.1 -124% -4.4 0 0% -

2018 -12 -12 18.4 1023.0 -14 2.0 -

2019F -18.5 -10.1 -9.7 -5.3 -28% -5.3 0 0% -

1.18 ADD 1.76 1.76 49.3%

2020F -0.2 7.6 -0.1 4.0 -175% 4.0 0 0% -

Normalised P&L Divisional Revenues (A$m) Elite wearables XOS Prosumer AMS Tactical Other Total Revenues

2021F 10.8 18.6 5.6 9.7 145% 9.7 0 0% -

2019 -12 -12 17.2 -71% -115.0 -10 1.8 -

2020 -1034 -1034 16.0 -6462% 11.7 -211.7 2.0 -

2021 21 21 14.9 141% 5.7 0.0 0.0 -

Valuation Risk Free Rate Equity Risk Premium Beta Cost of Equity Gearing Ratio Cost of Debt WACC Terminal Growth Rate (Y5) DCF Valuation Value Per Share

2017

2018

2019

2020

2021

250% 13% -

25% -94% -

32% -28% -36%

30% #N/A -32%

22% 100% 95%

5% -18% -23%

0% -19% -21%

-2% -19% -18%

13% -1% 0%

20% 8% 8%

-5% -3% -4%

-7% -5% -3%

-9% -6% -6%

7% 4% 4%

14% 10% 11%

-

-

-

-

-

% % % % % % % $m $/shr

6.0% 6.0% 1.15 12.9% 0% 4.0% 12.0% 7.5% 337 1.76

2017

2018F

2019F

2020F

2021F

17.3

27.3 33.3 0.1

18.7

60.8

33.7 37.3 2.0 2.2 0.1 1.0 76.1

45.1 42.4 7.3 3.8 1.6 2.0 101

56.9 44.2 16.1 4.8 3.8 2.0 131

71.4 47.9 21.6 5.8 6.4 2.0 159

-4.4

-4.4

2.5 9.0 -5.9 0.0 0.0 -2.8 3.0

5.4 10.3 -3.4 0.8 -1.9 -10.0 0.2

6.0 12.1 -8.6 1.9 -0.9 -9.8 -1.8

12.5 12.7 1.4 2.7 0.7 -10.5 17.6

20.5 14.0 5.3 3.4 2.5 -11.2 32.5

-1.8 -6.2 0.0 0 0 -8.6 2.8 -5.9 2.3 -3.6

-13.6 -10.6 0.0 0 0 -14.0 0.5 -13.6 10.5 -3.1

-14.7 -14.5 0.0 0 0 -16.1 -2.0 -18.1 10.2 -7.9

-17.4 -19.2 0.7 0 0 -18.5 0.0 -18.5 8.4 -10.1

-18.6 -1.0 0.8 0 0 -0.2 0.0 -0.2 7.8 7.6

-20.1 12.3 1.1 0 0 13.5 -2.7 10.8 7.8 18.6

Some corporate costs are included in the Elite Wearables unit. Balance Sheet 2016 2017 2018 2019 2020 Cash 3.6 16.7 28.3 14.3 19.9 Other ST Assets 12.3 32.2 18.5 20.2 22.3 PPE 4.2 7.7 9.0 11.2 13.9 Intangibles 9.9 104.5 118.8 116.4 111.9 Other LT Assets 4.5 10.4 12.1 12.1 12.1 Total Assets 30 161 175 162 168 Borrowings 0.0 0.7 0.0 0.0 0.0 Other Liabilities 18.2 45.8 48.2 50.9 54.0 Total Liabilities 18.2 46.5 48.3 51.0 54.1 Net Assets 11.9 114.8 126.5 111.4 114.3 Minorities 0 0 0 0 0

2021 39.2 24.8 17.1 107.3 12.1 189 0.0 58.3 58.3 130.4 0

Cash Flows EBITDA Interest paid Interest received Tax Paid Other Net Operating Cash Flow Capex Other investing cash flow Investing Cash Flow Financing Cash Flow Total Cash Flows

2021 32.5 0.0 1.1 -2.7 0.0 35.8 -16.5 0.0 -16.5 0.0 19.3

Divisional EBITDA (A$m) Elite wearables XOS Prosumer AMS Tactical Other Total EBITDA Deprec. & Amort. EBIT Finance Costs - net Minorities Associates PBT Tax NPAT - reported Adjustments NPAT - adjusted

(*) Market PER = ASX 100 Industrials PER

Key Ratios Growth Revenue Growth EBITDA Growth EBIT Growth Margins EBITDA/Sales EBIT/Sales Pre-Tax/Sales Efficiency ROE ROA ROIC Leverage Net Debt/Debt+Equity EBITDA/Interest Cover Net Debt/EBITDA Catapult has no net debt.

2016

Company Contacts Catapult International 1 Aurora Lane Docklands Victoria 3008 Australia Telephone: +61 3 9095 8410

2016 -4.4 0.0 0.0 0.0 0.7 -4.3 -6.5 1.0 -5.5 5.7 -2.0

2017 3.0 -2.8 0.1 0.0 0.1 -10.5 -10.7 -82.2 -92.9 115.4 13.6

2018 0.2 -0.1 0.1 0.0 0.0 7.4 -13.0 -1.5 -14.5 20.8 11.7

Chairman Chief Executive CFO

2019 -1.8 0.0 0.7 0.0 0.0 1.0 -15.0 0.0 -15.0 0.0 -14.0

2020 17.6 0.0 0.8 0.0 0.0 20.5 -14.9 0.0 -14.9 0.0 5.6

Dr Adir Shiffman Mr Joe Powell Mr Mark Hall

www.catapultsports.com.

SOURCE: MORGANS RESEARCH, COMPANY

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Pedal to the metal New funds give best chance of success Catapult has announced plans to raise A$25m in additional capital in order to accelerate the rate of investment in sales and marketing and new technologies. The new funds will be invested in Elite wearables sales and marketing (A$9m), the rollout and expansion of the Prosumer product range (A$9m), development of the new Tactical Coaching tool suite (A$3.0m) and investment in the core technology stack (A$2.8m). The company said that no new equity funding should be required before the company becomes cash flow self-sustaining. “Based on the company’s current strategy and supported by its three-year plan, management does not anticipate requiring additional equity funding before becoming cash flow positive,” the directors said. The following table sets out the proposed usage of the new funds. Figure 2: Catapult uses of funds Uses Of Funds Elite sales and marketing

A$m 9.0

Prosumer roll-out and expansion

9.0

Tactical product development

3.0

Investment in technology stack

2.8

Transaction fees

1.2

Total Uses

25.0 SOURCES: CATAPULT

Elite Wearables sales and marketing Catalyst plans to spend roughly A$4.5m a year over and above the “business as usual” case over FY19 and FY20 in adding new sales and technical customer service staff, many in geographic areas where Catapult does not currently have permanent offices. This investment will lift the total full-time equivalent sales force to about 90 people. The new investment in sales and marketing will be closely monitored by the CEO and CFO to make sure that it delivers the required level of sales momentum. Our revised forecasts only assume a modest uplift in revenues from this initiative in Elite Wearables from FY20 onwards.

Prosumer roll-out Catalyst plans to spend roughly A$9m over 12-18 months on heightened marketing, logistics and customer service associated with the launch of the new Prosumer device in FY19. We assume that A$7m of this is treated as an operating expense and a further A$2m is working capital (not expensed). Virtually all of the expense impact will fall in FY19.

Technology investment Catalyst plans to spend A$3.0m on development of its new coaching Tactical analytics tools and A$2.8m on improving the performance of its overall technology stack over 12-18 months. These costs will be capitalised and amortised, as usual for core technologies, over four years.

Cash flow break-even Catalyst’s fund raising document implies that the company does not anticipate becoming cash flow break-even before FY21. In our view management’s forecast on this issue is overly cautious, as for this to occur the rate of sales momentum would need to slow materially from our current projections. Our forecasts assume a small (A$5m) free cash flow surplus to be generated in FY20.

3


Impact on earnings forecasts Catalyst has tended to expense most of its new business and technology development costs, rather than capitalise such costs and amortise them over time. Thus some capital costs are bundled with normal operating expenses, making the underlying operating performance of each business difficult to estimate. The decision to accelerate investment spending has thus had a detrimental impact on our earnings forecasts. Changes to our forecasts are shown in the following table. Key changes to our forecasting assumptions were: 

An increase in marketing and customer support costs (expensed) in Elite Wearables of A$4.5m a year, commencing in July 2019. We assume no incremental revenue uplift from this sales and marketing cost in FY19 and a steadily rising revenue uplift from FY20. We assume the elevated level of sales and support spending continues in perpetuity.



An additional outlay (expensed) for Prosumer product marketing and logistics of A$7m in FY19, with no incremental revenue uplift from this investment until the FY20 year.



Roughly A$2m of the A$9m earmarked to be invested in Prosumer is working capital and thus has no impact on reported earnings.



The A$3m targeted for Tactical product development and A$2.8m for investment in the core technology stack will be capitalised and amortised over four years.



Overall operating costs are higher than our previous forecast. Thus while terminal year revenues are revised upwards, our terminal year EBITDA is essentially unchanged.

Figure 3: Changes to profit forecasts YE June Revenues Former Revised Ebitda Former Revised NPAT - reported Former Revised NPAT - adjusted Former Revised EPS - underlying Former Revised EPS - reported Former Revised

2018

2019

2020

2021

2022

$m $m

76.1 76.1

100.7 100.7

125.8 130.6

148.4 159.4

167.6 185.1

$m $m

0.2 0.2

11.8 -1.8

24.6 17.6

36.2 32.5

45.8 45.6

$m $m

-18.1 -18.1

-4.6 -18.5

7.8 -0.2

14.8 10.8

23.0 21.9

$m $m

-7.9 -7.9

3.8 -10.1

15.6 7.6

22.6 18.6

25.9 24.8

$m $m

-4.7 -4.1

2.3 -5.3

9.3 4.0

12.5 8.9

14.9 12.5

¢ ¢

-10.8 -9.5

-2.7 -9.7

4.6 -0.1

8.8 5.6

13.7 11.4

SOURCES: MORGANS ESTIMATES

Impact on valuation and price target Our 12-month price target is set by our discounted cash flow (DCF) valuation. Due to the impact of higher investment spending highlighted above, and the dilution caused by the capital raising, our discounted cash flow valuation has declined to A$1.76 per share (from A$2.02 per share). Risks to our valuation and price target being achieved are set out in the risks and catalysts section below.

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Figure 4: Discounted cash flow valuation Year ended 30 June A$m EBIT D&A Ebitda Capex (SIB) WC Change Interest Tax Free Cash Flow Other adjustments Free Cash Flow

2018 2019 2020 2021 2022 (14) 15 0 -13 0 0 -2 (15) 3 (12)

(19) 17 (2) -15 0 0 0 (17) 2 (15)

(1) 19 18 -15 0 1 0 3 2 5

12 20 32 -17 0 1 0 17 2 19

29 17 46 -18 0 2 -7 22 2 24

Discount Factor 1.00 NPV of Free Cash Flow -12 NPV of Terminal Value NPV Ancillary revenues option Executive share plan dilution Total Present Value Shares Out NPV/Share

0.89 -13

0.80 4

0.71 14

0.64 15 337 336 30 -29 337 191 1.76

Modelling Assumptions Risk Free Rate Equity Risk Premium Company Beta Cost of Equity Debt % Cost of Debt Tax Rate WACC Long Term growth rate Implied TV Multiple Discounted Terminal Value NPV $

6.0% 6.0% 1.2 12.9% 0% 4.0% 30% 12.0% 7.5% 22.2 337 336

SOURCES: MORGANS ESTIMATES

Risks and catalysts Risks to Catapult’s near-term revenues and share price include: 1) failure to secure major league-wide deals; 2) new team-based contract signings fall short of expectations; 3) further operating cost blow-outs; and 4) irrational competitor behaviour or a major league-wide deal by a competitor with negative implications for Catapult. Potential near-term re-rating catalysts for Catapult include: 1) winning one or more significant league-wide subscription deals; 2) better-than-expected team-based subscription sales; 3) better- than-expected cost controls; and 4) loss of a major client by a close rival.

Investment view Catapult’s closing share price yesterday trades substantially below our revised valuation and we therefore retain an ADD recommendation. As Catapult has not yet become self-sustaining from a cash flow view, the stock is high risk.

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Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.

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Regulatory disclosures Analyst owns shares in the following mentioned company(ies): Morgans Corporate Limited was a joint lead manager to the placement & SPP of shares in Catapult Group International Limited and received fees in this regard.

Recommendation structure For a full explanation of the recommendation structure, refer to our website at http://www.morgans.com.au/research_disclaimer

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