Australia | Oct 19 2009
By Chris Shaw
Being in the recruitment and human resources field was not an advantage during the worst of the global economic downturn but with the Australian labour market proving to be very resilient, RBS Australia suggests there is value on offer in Talent2 International ((TWO)), the broker initiating coverage on the stock today with a Buy rating.
The company offers two sets of services, a recruitment business specialising in white collar and contractor recruitment, as well as a managed services operation where it offers payroll, recruitment process outsourcing and learning and development services to businesses.
The latter in particular has caught the broker’s eye as it sees scope for outsourcing to play a bigger role for businesses throughout Australasia in coming years, and the company is currently a leading player in the sector. As well, the signs of improvement in the broader economy bode well for the recruitment operations in its view, particularly as that is a largely fixed cost business.
Given this the broker suggests its forecast for EBITDA (earnings before interest, tax, depreciation and amortisation) in FY10 of $19 million, which compares to the $10.6 million recorded in FY09, is conservative, as a return to profits for the recruitment division and the company’s cost-out program offer upside. Upside could also come from potential for new HR outsourcing contracts in coming months as management has flagged the possibility of a number of such deals before the end of the year.
The broker also sees scope for the company to use its strong balance sheet and solid cash flows to its advantage by pursuing expansion opportunities in Asia, and it expects this potential will be delivered on if deals are made as management is very experienced in the business.
In earnings per share (EPS) terms, the broker is forecasting 7.7c this year and 11.1c in FY11, which implies a small premium to the Small Industrials sector given it equates to a normalised P/E (price to earnings ratio) of around 19.5 times, though the forecast earnings growth in FY11 would see this come down to a P/E of about 13.5 times and this implies good value in its view.
Given a market capitalisation of a little less than $200 million the stock doesn’t receive much coverage, with GSJB Were providing the only recent update in FNArena database. Weres had a Hold rating on TWO in August, with EPS estimates of 4.4c and 8.1c respectively for FY10 and FY11. Citi was covering the stock but has since fallen by the wayside.
RBS Australia’s price target has been set at $2.00, which is a slight discount to its sum of the parts valuation of $2.14. GSJB Were’s price target from August stands at $1.25. Shares in Talent2 today are slightly higher and as at 2.30pm the stock was up 2.5c at $1.54. Over the past year it has traded between $0.42 and $1.56.
