Defenx, Well-Placed in $6bn Mobile Security Market say Beaufort Securities

Defenx PLC (LON:DFX) has issued its year end trading statement today, which highlights strong double-digit organic revenue growth during H2-16, plus a sharp bounce-back in operating profit. Cash collection remains an issue, but the implementation of debt factoring will alleviate this going forward. Trading on only 2.4x FY-17 EV/EBITDA this business is undervalued. A multiple of 4.0x is more appropriate we believe.
Defenx PLC, well-placed in a $6bn market . DFX is well positioned in the fast growing, global mobile phone security market. This software market is still in its infancy but is rapidly expanding and estimated to be worth $6bn, across nearly 6bn smartphones by the year 2019/20.
Focus upon Android. DFX is primarily focused upon Android technology for two key reasons; first this is the worldwide market leading mobile platform and secondly, because it is an open system, it has been the most attacked platform, and this is likely to continue. That said, it recently launched its Mobile Security Suite (MSS) for Windows 10 Phone, which together with the Android and iOS versions, addresses the top three smartphone operating systems and over 90% of the worldwide market. Defenx also offers security solutions to protect interconnected devices, combining its MSS for Android, IOS or Windows and the Defenx Security Suite for PC.
Trading Update. Defenx issued its H2-16 trading update today, ahead of full year results due in April. Second half organic revenue growth has remained strong at 50%, with the first time contribution from the Memopal acquisition contributing to total H2-16 revenue growth of 63%. Operating profit has bounced back strongly too, albeit with weaker cash collection, but his will be alleviated with the introduction of debt factoring in FY-17.
Valuation and Recommendation. We forecast continuing strong organic revenue growth in FY-17E at around 54%, with EBIT margin development and an improved working capital profile. We put DFX on 4.0x FY-17 EV/EBITDA, which we think is entirely reasonable for this business.

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