Candle Tipped To Benefit From Higher IT Spending

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By Chris Shaw

With surveys showing a number of Australian corporations plan to lift their IT spending in 2007 after a lengthy period of underinvestment, a likely winner according to JP Morgan will be Candle Australia (CND) given its position as one of the largest IT recruitment companies in the Australian marketplace.

The broker suggests the higher IT spending is likely to flow through into stronger demand for both permanent and contract staff, an important point for a recruiter such as Candle as permanent placements are usually higher margin. With this in mind the broker is forecasting a 66% increase in net profit after tax for the company this year to $11.9m. Management have guided to a profit result of $11.6m.

Of the increase, it expects organic growth will contribute 20% and the balance will come from recent acquisitions such as Lloyd Morgan, Parker Bridge and Choice IT. Such a result would be a continuation of the company’s recent strong earnings growth performance, as evidenced by net profit in FY05 being up 57% from the previous year.

A significant slowing in FY07 is unlikely in the broker’s view, as it notes a full year of contributions from the Lloyd Morgan acquisition, which should help the company increase its proportion of permanent placements, should see organic growth of 19% and higher margins. The broker is forecasting a FY07 net profit of $15.6m, well above market consensus of around $13.6m. Looking out further it sees strength in the recruitment cycle until FY09, though profit growth should slow slightly in FY08 given its forecast of $17.6m.

With the company indicating its intention to pay out about 70% of earnings by way of dividends the broker sees the yield becoming increasingly attractive. It is forecasting dividends of 19c this year, increasing to 24c next year and 26c the year after, suggesting a fully franked yield of almost 6% this year and more than 7% in both FY07 and FY08.

The strong earnings outlook and attractive yield support the broker’s Overweight rating, while its share price target of $3.74 is an attractive premium to its valuation of $3.12 and last closing price of $3.30.

The broker is the only one in the FN Arena database to cover the stock.

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