RBS Australia Adds Another Buy On Customers

This story features COPPER SEARCH LIMITED. For more info SHARE ANALYSIS: CUS

By Chris Shaw

Supplying ATM machines to the likes of convenience stores and petrol stations is not a particularly exciting business at face value, but for Customers ((CUS)) it is one that will likely prove quite profitable in coming years, enough so for RBS Australia to initiate coverage on the stock with a Buy rating in combination with a $3.48 price target.

As RBS points out, while the company is the leader in the Australian ATM market with a fleet of some 5,800 machines, its strategic focus in locating machines in such sites as mentioned above means it is rarely in direct competition with financial institutions. The added advantage of significant pricing power gives this lack of a major head-on competitor in its markets.

The other positive in its view is with direct charging being introduced into the Australian market in March of last year, the structure of the industry as a whole has improved, while increases to the fees Customers charges for transactions at most of its terminals supports a solid earnings outlook.

According to RBS, growth is likely to come not only from fee increases but from higher contractual revenues from branding rights on its ATM fleet and from new customers. In addition, there is also scope for cost efficiencies to further boost earnings in coming years. The stockbroker’s forecasts reflect this as RBS expects earnings per share (EPS) to grow from 19.4c this year to 23c in FY11 and 26.4c in FY12.

Deutsche Bank is even more positive with its forecasts, anticipating the company will deliver EPS of 23c this year and 25c in FY11, while consensus forecasts according to the FNArena database stand at 21.4c and 23.3c respectively for FY10 and FY11.

As with RBS Australia, Deutsche Bank rates Customers as a Buy, pointing to a capital distribution approved by the Australian Tax Office as a sign of things to come with respect to capital management. The company is expected to generate free cash flows of $39-$45 million annually going forward, well above its estimates for dividend payments of $25-$27 million.

Given this surplus cash, Deutsche expects either more capital returns or higher dividends, while it also thinks the stock is cheap on its earnings estimates. Deutsche’s forecasts indicate a FY11 earnings multiple of around 11.3 times, which compares to peers on around 14 times earnings.

While there are risks including continued growth of non-cash payments and alternate means of withdrawing cash, RBS takes the view the slow moving nature of payment trends means there is good visibility with respect to the business and how it is performing. As well, recent regulations lead it to suggest there are not likely to be further significant changes to the industry in the shorter-term.

On RBS Australia’s numbers, the stock is trading at around parity with the Small Industrials Index on FY11 forecasts, making it solid value given the forecast earnings growth profile indicated by its estimates. Others in the market agree as the FNArena database shows Customers is rated as a Buy by all five leading brokers that cover the company.

The average price target according to the database is $3.64, while shares in Customers today are weaker amidst a non-discriminatory sell-off. As at 10.50am the stock was down 8c at $2.71. This compares to a range over the past year of $1.18 to $3.31.

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