BANCTEC INC BTEC
January 03, 2011 - 10:36pm EST by
jordash111
2011 2012
Price: 3.00 EPS -$1.09 -$0.44
Shares Out. (in M): 18 P/E NA NA
Market Cap (in $M): 53 P/FCF NA 3.6x
Net Debt (in $M): 59 EBIT -17 -1
TEV ($): 111 TEV/EBIT NA NA

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Description

 

Please note that BancTec is a very illiquid investment and is not trading on an exchange.  Shares are currently trading in the portal at around $3.00 per share. 

Overview

BancTec  is a payment and document processing and automation solutions company.  They offer clients business process outsourcing (BPO) services as well as in-house business solutions, including software and hardware products and professional services and maintenance.  Clients primarily include financial firms, healthcare companies, insurance companies and government organizations.  The company generates roughly half of their revenues from the US and the other half from Europe.  

Traditionally, BancTec has been known as a hardware company that provides check and document scanning equipment.  Over the past several years, however, BancTec has focused on ramping up its BPO business.  BPO as a percentage of BancTec's sales has gone from 11% in 2006 to 38% in 2010.  BPO presents an attractive value proposition for companies that are looking to cut costs by outsourcing their document, back office and mail room operations.  This business is very lumpy and success depends on BancTec's ability to sign large long term contracts.  Since BPO contracts typically have a duration of 7-10 years customers are very careful when it comes to committing.  Industry growth in the more paper/document intensive BPO space that BancTec competes in is in the 10% range, though BancTec believes they can grow faster than that and our channel checks suggest that should be the case.  Outside of BPO, a little over half of BancTec's business is dependent on check and paper based payment processing, which is declining 6-8% as customers continue to move away from check based transactions.  BancTec believes they can offset these declines with non check equipment sales and are encouraged by the recovery in US and Europe solutions business in the 2nd half of 2010, their recent European acquisition of ECM, and opportunities for partnering with resellers in the Asia-Pacific and Middle East.

Margin Opportunity

Since BancTec has been investing into ramping up their BPO business their BPO gross margins have been hovering in the high single digit range, which implies the business is currently losing money.  Meanwhile BPO peers enjoy gross margins that can be as high as 40%.  In BancTec's more mature European BPO business, EBITDA margins are in the 20%-25% range.  Over the past several years BancTec has been opening new facilities in the US and investing in a technology platform to handle large contracts.  BancTec believes they have now reached the point in the US where they can layer in new business wins on top of the existing infrastructure and achieve scale and grow margins.  Furthermore, as of the 3rd quarter BancTec has started moving staff offshore to India in order to cut costs and make manual labor tasks, such as verifying a signature on a document that is difficult for a machine to read, much cheaper.  BPO peers with offshore operations are able to recognize substantially higher margins.  BancTec intends to move 40 staff positions offshore over the next several quarters.  Between growing the top line, scaling the US business and moving labor offshore, we see no reason why BPO gross margins shouldn't get to at least 15% in 2011 and get into the mid 20s longer term.  Since depreciation is included in COGs, BancTec believes EBITDA margins in BPO should not be much different from gross margins.  We see the strong potential for top line growth in BPO (10% +) as well as the opportunity for EBITDA margin expansion (from loss making to 15%+) as a major source of underappreciated value creation and the core of our BancTec investment thesis.

Valuation

After dipping severely in the first half of 2010 to the low single digits, due to delayed timing of business wins, EBITDA has bounced back in the 3rd quarter to $6.0m.  The company expects 4th quarter (seasonally strongest) EBITDA to exceed $7.0m.  With conservative assumptions for top line growth and gross margin of 15% in BPO, we believe BancTec should be able to achieve $25.5m of EBITDA in 2011 and $14.8m of free cash flow (assuming maintenance CapEx).  At the current portal trading price of $3.00 you can own this business at 4.4x EBITDA and 3.6x free cash flow.  Every additional percentage point of gross margin improvement in BPO adds approximately $1.0m of EBITDA. 

It is hard to find a publicly traded BPO peer that is as document and paper oriented as BancTec, but there are several comparables we can look at for reference.  High growth (20%) and high margin (20% EBITDA) BPO companies that operate offshore or offer a more automoated and electronic solution, such as ExlService Holdings, WNS Holdings Genpact and Bottomline Technologies trade at around 10.0x EBITDA.  Low growth companies with no BPO exposure, such as Deluxe and Beta Systems Software trade at around 5.0x EBITDA.  Companies that offer software solutions to the banking industry, such as Fidelity National Information Services and Fiserv, trade at 7.5x-8.0x EBITDA.  We believe that given BancTec's opportunity to expand its BPO business, it should trade higher than 5.0x but given its small size, illiquidity and exposure to less profitable, labor intensive paper/document based BPO, it should also trade lower than 10.0x.  At a conservative 6.0x 2011 EBITDA of $25.5m, BancTec should be worth at least $5.40.  If we were to give BancTec credit for 20% EBITDA margin in their BPO business, the valuation jumps to $7.25.  It is useful to keep in mind that BancTec attempted an IPO back in April, 2010 with an offering price range of $8.00-$10.00.  Management owns 2.4m of vested and unvested RSUs out of a total fully diluted share count of 17.6m so they are appropriately incentivized to maximize value.
 

Risks

  • BancTec is not able to innovate towards more profitable automated and electronic BPO solutions as opposed to its current more labor intensive and paper/document oriented solutions and is thus unable to offer clients a compelling value proposition relative to their competitors. We do not believe this to be the case since conversations with a BPO consultant and channel checks suggest that customers are happy with BancTec's service.  Focusing more on electronic and automated solutions and relying less on labor presents another opportunity for BPO margin expansion to the extent they can move the business in this direction.      
  • BancTec is unable to grow its hardware and software solutions business enough to offset the decline in check and paper based payment processing
  • BancTec is unable to go through with the IPO process and achieve a revaluation of the share price

Catalyst

IPO - The previous IPO attempt was dropped since 2010 quarterly filings were unaudited at the time and the company decided to pursue the acquisition of ECM.  The company hopes to revisit the IPO process after the 4th quarter, which could present an exit opportunity or a revaluation of the company from current trading levels

M&A - In October 2010, BancTec adopted a shareholder rights plan.  We believe the timing suggests that management perceived the company to be drastically undervalued and was concerned that an acquirer would attempt to take advantage of the depressed share price.  We also believe an acquisition of BancTec could make sense for a larger BPO player.

Improved and Consistent Financial Performance - BancTec performed horribly in the first half of 2010 and the business they expected to win got pushed out to the back half of the year.  The 3rd quarter results and 4th quarter guidance are a good sign that the business is back on track.  Also, 2010 had restructuring charges which obscured the gross margin.

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    Description

     

    Please note that BancTec is a very illiquid investment and is not trading on an exchange.  Shares are currently trading in the portal at around $3.00 per share. 

    Overview

    BancTec  is a payment and document processing and automation solutions company.  They offer clients business process outsourcing (BPO) services as well as in-house business solutions, including software and hardware products and professional services and maintenance.  Clients primarily include financial firms, healthcare companies, insurance companies and government organizations.  The company generates roughly half of their revenues from the US and the other half from Europe.  

    Traditionally, BancTec has been known as a hardware company that provides check and document scanning equipment.  Over the past several years, however, BancTec has focused on ramping up its BPO business.  BPO as a percentage of BancTec's sales has gone from 11% in 2006 to 38% in 2010.  BPO presents an attractive value proposition for companies that are looking to cut costs by outsourcing their document, back office and mail room operations.  This business is very lumpy and success depends on BancTec's ability to sign large long term contracts.  Since BPO contracts typically have a duration of 7-10 years customers are very careful when it comes to committing.  Industry growth in the more paper/document intensive BPO space that BancTec competes in is in the 10% range, though BancTec believes they can grow faster than that and our channel checks suggest that should be the case.  Outside of BPO, a little over half of BancTec's business is dependent on check and paper based payment processing, which is declining 6-8% as customers continue to move away from check based transactions.  BancTec believes they can offset these declines with non check equipment sales and are encouraged by the recovery in US and Europe solutions business in the 2nd half of 2010, their recent European acquisition of ECM, and opportunities for partnering with resellers in the Asia-Pacific and Middle East.

    Margin Opportunity

    Since BancTec has been investing into ramping up their BPO business their BPO gross margins have been hovering in the high single digit range, which implies the business is currently losing money.  Meanwhile BPO peers enjoy gross margins that can be as high as 40%.  In BancTec's more mature European BPO business, EBITDA margins are in the 20%-25% range.  Over the past several years BancTec has been opening new facilities in the US and investing in a technology platform to handle large contracts.  BancTec believes they have now reached the point in the US where they can layer in new business wins on top of the existing infrastructure and achieve scale and grow margins.  Furthermore, as of the 3rd quarter BancTec has started moving staff offshore to India in order to cut costs and make manual labor tasks, such as verifying a signature on a document that is difficult for a machine to read, much cheaper.  BPO peers with offshore operations are able to recognize substantially higher margins.  BancTec intends to move 40 staff positions offshore over the next several quarters.  Between growing the top line, scaling the US business and moving labor offshore, we see no reason why BPO gross margins shouldn't get to at least 15% in 2011 and get into the mid 20s longer term.  Since depreciation is included in COGs, BancTec believes EBITDA margins in BPO should not be much different from gross margins.  We see the strong potential for top line growth in BPO (10% +) as well as the opportunity for EBITDA margin expansion (from loss making to 15%+) as a major source of underappreciated value creation and the core of our BancTec investment thesis.

    Valuation

    After dipping severely in the first half of 2010 to the low single digits, due to delayed timing of business wins, EBITDA has bounced back in the 3rd quarter to $6.0m.  The company expects 4th quarter (seasonally strongest) EBITDA to exceed $7.0m.  With conservative assumptions for top line growth and gross margin of 15% in BPO, we believe BancTec should be able to achieve $25.5m of EBITDA in 2011 and $14.8m of free cash flow (assuming maintenance CapEx).  At the current portal trading price of $3.00 you can own this business at 4.4x EBITDA and 3.6x free cash flow.  Every additional percentage point of gross margin improvement in BPO adds approximately $1.0m of EBITDA. 

    It is hard to find a publicly traded BPO peer that is as document and paper oriented as BancTec, but there are several comparables we can look at for reference.  High growth (20%) and high margin (20% EBITDA) BPO companies that operate offshore or offer a more automoated and electronic solution, such as ExlService Holdings, WNS Holdings Genpact and Bottomline Technologies trade at around 10.0x EBITDA.  Low growth companies with no BPO exposure, such as Deluxe and Beta Systems Software trade at around 5.0x EBITDA.  Companies that offer software solutions to the banking industry, such as Fidelity National Information Services and Fiserv, trade at 7.5x-8.0x EBITDA.  We believe that given BancTec's opportunity to expand its BPO business, it should trade higher than 5.0x but given its small size, illiquidity and exposure to less profitable, labor intensive paper/document based BPO, it should also trade lower than 10.0x.  At a conservative 6.0x 2011 EBITDA of $25.5m, BancTec should be worth at least $5.40.  If we were to give BancTec credit for 20% EBITDA margin in their BPO business, the valuation jumps to $7.25.  It is useful to keep in mind that BancTec attempted an IPO back in April, 2010 with an offering price range of $8.00-$10.00.  Management owns 2.4m of vested and unvested RSUs out of a total fully diluted share count of 17.6m so they are appropriately incentivized to maximize value.
     

    Risks

    • BancTec is not able to innovate towards more profitable automated and electronic BPO solutions as opposed to its current more labor intensive and paper/document oriented solutions and is thus unable to offer clients a compelling value proposition relative to their competitors. We do not believe this to be the case since conversations with a BPO consultant and channel checks suggest that customers are happy with BancTec's service.  Focusing more on electronic and automated solutions and relying less on labor presents another opportunity for BPO margin expansion to the extent they can move the business in this direction.      
    • BancTec is unable to grow its hardware and software solutions business enough to offset the decline in check and paper based payment processing
    • BancTec is unable to go through with the IPO process and achieve a revaluation of the share price

    Catalyst

    IPO - The previous IPO attempt was dropped since 2010 quarterly filings were unaudited at the time and the company decided to pursue the acquisition of ECM.  The company hopes to revisit the IPO process after the 4th quarter, which could present an exit opportunity or a revaluation of the company from current trading levels

    M&A - In October 2010, BancTec adopted a shareholder rights plan.  We believe the timing suggests that management perceived the company to be drastically undervalued and was concerned that an acquirer would attempt to take advantage of the depressed share price.  We also believe an acquisition of BancTec could make sense for a larger BPO player.

    Improved and Consistent Financial Performance - BancTec performed horribly in the first half of 2010 and the business they expected to win got pushed out to the back half of the year.  The 3rd quarter results and 4th quarter guidance are a good sign that the business is back on track.  Also, 2010 had restructuring charges which obscured the gross margin.

    Messages


    SubjectPortal
    Entry01/04/2011 12:57 AM
    Memberbriarwood988
    Thanks for the write-up. Can you give more color on what you mean by the portal? I see filings on the SEC website but wasn't sure how you would go about acquiring shares prior to a potential IPO? 

    Thanks,
    Briarwood 

    SubjectRE: Portal
    Entry01/04/2011 10:30 AM
    Memberjordash111
    You can use the broker FBR Capital Markets to acquire the shares.     
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