Australia | Apr 13 2011
– As 2010 brought many disappointments, shares in CSG Ltd weakened more than 30%
– Recently, stockbrokers seem to be warming towards the stock again
– BA-ML has upgraded to Buy
By Chris Shaw
Last year marked a significant turnaround in the fortunes of information and communications technology group CSG Limited ((CSV)) with each disappointing announcement seemingly being following by another one. Investors decided it was best to abandon their previous fast running champion stock and in February analysts at RBS even went as far as to question whether the company still deserved to be considered "investment grade". No surprise thus, CSG's share price performance has not been that flash (down more than 30% over the year) and that is an understatement, without discussion.
However, it would appear that overall market sentiment towards the company is improving again. Company management has updated its earnings guidance to the market, indicating full year net profit after tax for FY11 will be between $38-$42 million.
The update highlighted how CSG's printing operations in Queensland were impacting on earnings. Macquarie notes this reflects the impact of the Brisbane and Toowoomba floods, the Christchurch earthquake, an ongoing court case and and the loss of 500 machines in field (MIF), which refers to photocopiers in the market.
As Macquarie points out, these issues have emerged at the same time as CSG is integrating Canon services into its existing printing business, which has meant some significant start-up costs and working capital requirements as the business scales up.
The update sees changes to a number of broker's earnings forecasts, BA Merrill Lynch lifting its numbers by 3% in FY11 and by 12% in FY12. Earnings per share estimates for BA-ML now stand at 15.5c and 17.9c respectively.
Morgan Stanley has gone the other way and cut forecasts by 6% and 10% respectively for FY11 and FY12, but Morgan Stanley did keep a positive rating for the shares and this hasn't changed. Macquarie's estimates are largely unchanged. Consensus EPS forecasts according to the FNArena database stand at 15.3c and 17.5c respectively.
On BA-ML's numbers, CSG Limited is now cheap, trading on an earnings multiple of around eight times for FY12 against peers on multiples of closer to 12 times earnings. This is despite offering potential for 15% earnings growth in the coming year on BA-ML's estimates. As well, the stock has fallen 34% on an absolute basis over the past 12 months.
But value is not the only story for BA-ML, as the broker notes disclosure with respect to earnings has improved recently, a trend expected to continue going forward. There is also scope for additional increases to earnings forecasts as operational improvements flow through.
Given the combination of a more positive outlook and relative value BA-ML has upgraded to a Buy rating, while lifting the price target to $1.82 from $1.39. The upgrade by BA-ML is the first positive view on CSG since RBS Australia downgraded to a Sell rating back in February. (RBS has yet to update its thoughts since).
The rest of the market is yet to embrace CSG to the same extent as BA-ML, as the FNArena database shows one Buy and one Sell recommendation and two Holds. Macquarie, which has one of the Hold ratings, suggests earnings delivery from acquisitions will be needed for the stock to be re-rated.
UBS offers a similar view, suggesting while recent acquisitions such as the Canon printing services are starting to deliver, there is still some integration risk. Given the company's poor recent earnings history, one would expect this risk is likely to keep investors on the sideline until evidence of improvements in financial performances become available.
Following the update to earnings guidance, the consensus price target for CSG according to the FNArena database now stands at $1.48. This is up from $1.37 prior to the update. Morgan Stanley is not in the database but has a target of $2.25 on CSG, while siding with BA-ML in rating the stock as Overweight within an In-Line view on Australian emerging companies.
What attracts Morgan Stanley is post the recent operating update from management, there is a positive growth profile for CSG across both the printing and technology solutions businesses. As well, current earnings issues imply a low base from which CSG should deliver solid earnings growth in FY12.
There are also some structural trends working in CSG's favour, suggests Morgan Stanley.The first is the print market is seeing consolidation of dealerships by manufacturers, which offers value to an informed buying group.
The second is consulting revenue is moving from software companies to specialist service providers, which to Morgan Stanley suggests significant possible upside from CSG's relationships with Oracle and Microsoft.
The shares have moved within a trading range over the past year of $0.95 to $2.30. At current levels the stock offers implied upside of a little more than 12% to the consensus price target in the FNArena database.
