STW Communications Offers Value

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– STW Communications Group reiterates earnings guidance
– Soft outlook sees brokers trim estimates
– Yield and multiple attractive but operating outlook tough

By Chris Shaw

At STW Communications Group's ((SGN)) annual general meeting earlier this week full-year earnings guidance for growth of 5-10% in net profit after tax terms was reiterated. The result now appears likely to come in at the lower end of this guidance range, given a still subdued economy and consumer sentiment.

To reflect the update on guidance, Moelis has trimmed earnings forecasts by 3% annually across the next three years. In earnings per share (EPS) terms, forecasts for Moelis now stand at 11.2c for FY11, 12.3c for FY12 and 13.4c for FY13.

Forecasts elsewhere have similarly been adjusted, Macquarie trimming forecasts by 2-4% through FY12 and RBS Australia lowering numbers by 3-4% through FY13. Consensus EPS forecasts according to the FNArena database now stand at 11.1c for FY11 and 12.6c for FY12.

Despite the cut to its numbers, Moelis suggests there is limited downside risk to earnings for STW Communications given traditional resilience to broader economic conditions. Macquarie is not so sure, taking the view there remains downside earnings risk given a softening industry outlook.

What should also assist with respect to earnings is that STW Communications appears well placed to capture the ongoing shift to digital media. Moelis points out STW Communications should generate 24% of group revenues from digital media this year, up from 17% in FY09. 

The current portfolio should ensure this ongoing shift to digital media is captured by STW Communications as well or better than competitors in the view of Moelis.

While conditions remain tough domestically STW Communications has some growth options, particularly in Asia. As Moelis notes, management have been in discussions with potential partners regarding investment options in the region.

Given the difficult operating environment at present, RBS Australia suggests revised capital management policy of a payout ratio of 60-70% moving forward, up from 60% previously, is conservative. On the plus side, the increase in payouts shouldn't impact on target gearing levels.

Moelis expects solid cash flow generation will allow for debt levels to come down, even allowing for an increase in the payout ratio. As well, there is scope for surplus cash to either be returned to shareholders post the full year result, or for funds to be deployed for bolt-on acquisitions.

Relative to the sector STW Communications offers value according to Credit Suisse, as its numbers suggest the stock is trading on a FY11 earnings multiple of 9.7 times. This compares to the average of the domestic media sector excluding News Corporation ((NWS)) of 16.7 times.

This justifies an Outperform rating in Credit Suisse's view, one that is matched by RBS Australia. As RBS points out, in FY12 the earnings multiple for STW Communications improves further to 9.0 times, while the stock offers an attractive yield of 7.7% fully franked. As with Moelis, RBS Australia sees some scope for capital returns over the next 12 months.

In contrast, both Moelis and Macquarie rate STW Communications as a Hold, Moelis arguing earnings multiples are appropriate relative to the organic growth profile on offer. Macquarie agrees, having downgraded STW Communications to Neutral from Outperform given downside risk to earnings estimates.

The consensus price target for STW Communications according to the FNArena database stands at $1.42, well above Moelis's target of $1.10. The consensus price target implies share price upside of around 30% from current levels.

Shares in STW Communications today are slightly weaker and as at 11.30am the stock was down 0.5c at $1.08. This compares to a trading range over the past year of $0.80 to $1.375. 

 

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