If I were going to buy one ASX share this week it would be technology business Citadel Group Ltd (ASX: CGL).
A quick overview of Citadel
Citadel describes itself as a software and services company. It says that it manages information in complex environments on an anywhere-anytime basis.
It has a variety of different clients and sectors.
Citadel provides software for the public and private health sector for pathology, oncology and anaesthetist billing and practice management. Citadel provides software for all levels of government as well as large enterprise. Education and defence are two other sectors that the company services.
Benefits of Citadel
There are a number of positives about the Citadel business model.
The ASX share is a software business. I think technology is the best industry to be invested in at the moment. It’s the sector that’s delivering a lot of the longer-term growth because of how the world is getting increasingly technological (particularly due to COVID-19).
Once a software business has made the software it’s fairly cheap just to deploy it to the client with little incremental costs.
I like that Citadel has contracts with its clients. Contracts gives Citadel agreed revenue during the course of the contract. One-off revenue could be quite unreliable during this period.
Many of Citadel’s clients are defensive and lower-risk. Government clients are highly likely to be able to keep paying.
Wellbeing Software acquisition
Six months ago Citadel announced a company-changing acquisition for the ASX share. It announced the acquisition of Wellbeing Software, the UK market leading provider of radiology and maternity software that manages patient workflow and data. There are lots of reasons why this acquisition works so well.
In the UK, at least one of Wellbeing’s software solutions is used in 81% of NHS Trusts across England. In 2019 in generated £16.6 million of revenue, £10.1 million of gross profit and £6.5 million of earnings before interest, tax, depreciation and amortisation (EBITDA). This year it was predicted to generate £18.7 million of revenue.
The acquisition made Citadel the market leader of radiology and maternity software in the UK with a market share of 59% and 23%. Wellbeing’s retention rate was 99% over the prior three years to the acquisition and the average relationship length was over 10 years for its top 10 customers.
Wellbeing increases the ASX share’s recurring revenue. Steady revenue is very attractive with a software business. Around 70% of Wellbeing’s revenue is recurring and it has an EBITDA margin of close to 40%.
One of the biggest advantages of the acquisition is the ability to cross-sell. Citadel can sell its existing software to Wellbeing’s large client base and it can also sell Wellbeing’s software to Citadel’s client base. It could also sell the entire healthcare software package to new clients and markets.
Why I think Citadel is a buy this week
The ASX share is still lower than it was before the COVID-19 crash. The Citadel share price is 15% lower than the level it was on 21 February 2020.
But I think Citadel looks like a very good buy. One earnings estimate puts Citadel’s earnings per share (EPS) at $0.33 for FY22. That means Citadel is currently trading at just 12x FY22’s estimated earnings.
I’m not sure what the next six or twelve months will bring for the ASX share. A few months ago the company said that there hadn’t been any major COVID-19 effects. I think over the next few years Citadel has plenty of growth potential with its defensive earnings and quality client base.
Citadel also pays a dividend, which is a nice way for shareholders to be rewarded for owning shares whilst they benefit over the long-term from earnings growth. It currently offers a grossed-up dividend yield of 3.9%. I’m not sure what will happen to the ASX share’s dividend this year, but I think it can grow over the longer-term.
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Motley Fool contributor Tristan Harrison 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.
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