Australia | Aug 11 2010
By Chris Shaw
IT services provider Oakton ((OKN)) has struggled since the Global Financial Crisis, but the company appears to be turning around its performance after delivering a solid full year result of $20.2 million. Earnings largely met market expectations and according to UBS the quality of the result was good.
Of more importance to analysts is Oakton has started FY11 well, with order intake solid so far. BA Merrill Lynch notes order intake for FY11 so far is about 45% of the 2011 budget, a level higher than normal for this time of year.
According to UBS, the good start to the year reflects a focus on larger projects and managed services expansion, as well as improved client cross-sell ratios and a general pick-up in large ticket projects. This should drive some margin expansion in the broker's view.
Contract visibility has also improved in BA-ML's view, especially as Oakton has enjoyed some recent contract wins in the government space. The other favourable point, notes BA-ML, is the company is leveraging its offshore operations, which also has scope to boost margins.
Goldman Sachs agrees, estimating EBITDA (earnings before interest, tax, depreciation and amortisation) margins should improve from the 17% recorded in FY10 to around 20% by FY13 as revenues grow by around 10% annually.
There remain some issues in the view of Credit Suisse, as the broker notes while Oakton has picked up some market share in Sydney and Brisbane, the Melbourne and Canberra markets continue to perform below management's expectations. In the broker's view the outlook for government contracts also remains somewhat questionable.
Despite these concerns Oakton is expected to deliver solid earnings growth in coming years, Credit Suisse forecasting earnings per share (EPS) of 27.4c in FY11 and 33c in FY12. This compares to EPS in FY10 of 21.9c and implies increases to forecasts of 5.5% in FY11 and 11.6% in FY12.
Others in the market have also lifted earnings forecasts, with Goldman Sachs lifting its estimates by 2-3% to 25.5c in FY11 and 30.9c in FY12 and UBS to 26c and 30c from 25c and 28c respectively. Consensus EPS forecasts according to the FNArena database now stand at 26.5c in FY11 and 31c for FY12.
Post the result, the FNArena database shows ratings for Oakton are unchanged, the company receiving five Buy recommendations and two Holds. The average price target for Oakton has risen to $3.46 from $3.33.
In the view of BA-ML there is still good value on offer in Oakton, as at current levels the stock is trading at a discount to its global peers despite offering significantly better EPS growth in coming years.
Goldman Sachs makes a similar point as on its numbers Oakton is trading on a FY11 earnings multiple of around 12 times, which comes back to 11 times before legal fees related to ongoing arbitration with Tenix. This is too low a multiple for the earnings growth on offer in the broker's view.
But Credit Suisse suggests the risks still surrounding the stock are enough to likely limit any share price outperformance, so there is no change to its Neutral rating.
Shares in Oakton today are slightly weaker and as at 11.30am the stock was down 3c at $3.11. This compares to a range over the past year of $2.09 to $4.30 and implies upside of about 12% to the average price target in the FNArena database.
