In Brief: SKS Tech, Pro Medicus, Domino’s & Co

This story features SKS TECHNOLOGIES GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SKS

,SKS Technologies a small cap with a punch, Pro Medicus shines bright, OFX builds momentum and Domino’s comes up trumps.

-The adjacent tailwinds of data centres
-Visage Viewer an ongoing winner
-Virtual FX cards take on major banks
-Quick Service Restaurants still in focus

By Danielle Ecuyer

Quote of the week comes from Morgan Stanley:

 “In 2025, Cloud Capex spend will equate to the entire Apollo Space program in real terms. Countering rising questions about the ROIC on this spending, our AlphaWise survey shows strong enterprise uptake and that project results are generally meeting or exceeding targets.”

Riding the coat tails of data centres

SKS Technologies Group ((SKS)) could be a diamond in the world of electronics.

With a market cap of $157m, this small cap may have not yet caught the attention of investors. It did, however, catch the eye of the Morgans’ analyst, who initiated coverage with an Add rating (Buy equivalent) this week. 

SKS Technologies designs and installs electrical, audio visual and communications networking systems in Australia with exposure to data centres, defence, mining, health, retail and commercial buildings.

Notably, the company has experienced a strong uptick in demand since 2020 due to expanding into new customer segments and regions. Work-on-hand grew 91.8% over FY24 with revenues up 50.5%.

The analyst is particularly excited about the exposure to data centres. The Australian market is forecast to double to around $40bn by 2028 from $23bn currently. Think NextDC ((NXT)), Macquarie Technology ((MAQ)) as well as Goodman Group ((GMG)) to name just three listed companies among ASX beneficiaries.

SKS has secured over $190m in data centre contracts since FY23.

Investment in capacity is highlighted as a potential tailwind for over the next three to five years.

Observing management, Morgans emphasise the Jinks family are at the helm, previously from the KLM Group, and they bring forth over 40-years of experience.

Operating leverage should help boost profit before tax margins to around 7.2% in FY27 from 4.8% currently.

Management has guided to 90% revenue growth in FY25 which the broker believes underpins forecast EBITDA growth of 125% and EPS expansion of 75.8%.

Target price is set at $1.80, compared to the current share price around $1.40.

Pro Medicus a cut above the competition

Before you sigh and turn away, just hang on for a few more details and maybe some insights into why this company’s valuation makes Nvidia look like a value proposition.

Goldmans Sachs is unashamedly bullish on Pro Medicus, having upgraded the outlook in late September, the analyst probably felt more than vindicated with the latest contract announcement.

The company revealed it had renewed a contract with Mercy Health, one of the largest US health systems, for eight years at a value of $98m including two products, Visage Viewer and Open Archive.

So what? 

As always, the devil is in the detail. The terms of this contract were negotiated at a higher rate per transaction cost with an increase in the contract’s length from seven years.

The analyst believes the strength and pricing of the contract terms reflects the quality of the Visage product to customers and the ability to generate such high returns on investment.

Mercy Health is also expanding, recently merging with Bon Secours Health System on September 18, to form a larger entity and a more significant health network.

Ongoing organic growth or M&A for Mercy is a potential growth lever for Pro Medicus. The contract also doesn’t include any AI or Cardiology which may also present options in the future.

Goldman Sachs is firmly of the belief there is little evidence of competition being “close to matching the Visage solution”. Pro Medicus’ market share remains at a low 7%.

The broker reiterates “Stay Buy” with a $193 target price which was upgraded 30% on September 27.

Changing global financial plumbing 

To appreciate the potential implications for OFX Group ((OFX)), Evans and Partners met with Wise plc one of the company’s main competitors, which also include Airwallex and Revolut. These digital FX companies are targeting the global banks and the incumbent SWIFT system to compete for global payments and currency transfers.

Like Wise and Revolut for that matter, I fess up being a user, OFX is looking to expand its corporate virtual card business. The broker explains the card is expected to increase revenue per client via increased transactions, with fees charged on the transaction, as well as interest on card balances.

The usual margins will be applied on FX transactions.

OFX’ Business card offering allows up to three users per account and is applicable to entities needing simple FX transactions, inclusive of payment collection in the US, EU, UK and Australia with conversion into 37 currencies.

The second offering is a Business Plus card which costs $15 per user/per month for more “sophisticated users” with optical character recognition for extractions of details from invoice accounting systems such as Xero ((XRO)) and Quickbooks. 

Evans and Partners has a valuation price of $2.90 with a Positive recommendations. The broker does not provide targets.

Don’t get taco’ed away 

Quick-service restaurants are flavour of the month for brokers with RBC Capital Markets the next in line to initiate coverage on some of Australia’s favourite restaurant offerings. 

Offshore expansion is the extra tasty topping for investors, even though the Australian market is estimated to be growing around a 6% compound rate between 2023 and 2028 with a total size of $23.8bn, currently.

Over time, Australian food preferences have changed to increased health consciousness including plant-based/vegan alternatives with a tilt to sustainability, along flexibility of online and mobile ordering. 

Just ask a GenZ who would sooner order Uber Eats than walk 50m to a supermarket.

Think Economics estimates mature brands Subway, McDonalds, KFC and Domino’s occupy around 50% market share by percentage of stores with the fastest growing categories in Mexican and Japanese food, including growth of 34% for Sushi Hub, 26% for Guzman Y Gomez ((GYG)) and 25% for Zambrero. Younger generations are driving this trend.

By comparison, Germany is over threefold larger at $96.1bn, France at $60-$70bn, Japan at $89.3bn and the biggest, big burger of them all, the US at $642bn, according to RBC.

Domino’s Pizza Enterprises’ ((DMP)) share price has been nothing short of ravaged, down around -80% following a series of profit downgrades and cost imposts over the past three years, most of which were driven by offshore markets.

While RBC acknowledges the Japanese and French markets might prove to be longer-term turnaround prospects, the broker believes the multiple strategic changes including improved franchise profitability, menu innovation and localisation, and everyday pricing for a value offering will be part of the mix to improve earnings growth and like-for-like sales improvements over the medium term. 

Domino’s is the preferred sector exposure with Outperform (Buy equivalent) and a $42 target price.

Australians love of poultry continues to underpin Collins Foods ((CKF)) KFC franchisee operations, as the number one brand in Australia for quick service restaurants.

Hard to dispute “It’s Finger Lickin’ Good” when a KFC premise is now located within 3kms of 71% of Australians. We consume on a per-capita basis more than the global average of poultry. Although, as RBC highlights, the Australian market appears mature.

Expansion in Germany and France by comparison offers growth potential. RBC rates Collins Foods as Sector Perform (Neutral or Hold rating equivalent) with a $9 target price.

When it comes to Guzman Y Gomez, it’s not the thrill of breakfast burrito bowl that is turning off the RBC analyst, rather the spicy valuation,  which is just too hot-to-handle after an increase of 80% in the share price post IPO.

Comparisons with US peers are believed to be on the racy side of optimistic. The broker considers drawing similarities to high growth US quick service restaurants in a market which is 25x times larger than Australia’s is too blue sky’ optimistic.

RBC could have a point with 1Q25 results revealing US operations disappointed the market even if they were in line with management’s expectations.

The targeted expansion rate of 30 new stores p.a. over the short-term and growing to 40 new stores p.a. in five years, with 85% as a drive through, is acknowledged by the analyst as an “unprecedented” expansion rate in Australia. 

Hence, RBC pours some icy cold water on the growth projects and rates the stock as Underperform (Sell equivalent) with a $32 target price.

Goldmans Sachs chipped into the debate, reiterating the quality of the company while raising concerns again about expansion plans domestically, a “stretched valuation” with comparisons to US peers like Chipotle considered premature.

This broker also highlighted the stock overhang with circa 13% of total shares to be available for sale from escrow in March 2025. Sell rated with a $33.20 target price.

For more recent updates on the quick service restaurants stocks, check out the link below to last week’s In Brief.

https://fnarena.com/index.php/2024/10/04/in-brief-collins-food-dominos-guzman-y-gomez-artrya/

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