Small Caps | Jul 05 2012
– Moelis rates Chandler Macleod a Buy
– Earnings growth outlook is a positive
– Yields also attractive
– Stock offers value at current levels
By Chris Shaw
With a market capitalisation of just under $200 million, human resources and employment services group Chandler Macleod receives no coverage from the eight brokers in the FNArena database. One broker to see value in the stock is Moelis, who rates Chandler Macleod as a Buy with a price target of $0.50.
The reiteration of its Buy rating comes after Moelis met with management at Chandler Macleod, where earnings guidance for the second half of EBITDA (earnings before interest, tax, depreciation and amortisation) of more than the $19.9 million delivered in the first half was confirmed.
This guidance is consistent with Moelis's forecast for full year EBITDA of $42 million. Assuming this result is achieved, Moelis notes this would equate to earnings per share (EPS) growth of more than 25% for FY12, following the 32% increase delivered in FY11.
Contributing to the strong earnings growth in the view of Moelis is the high variable cost base of Chandler Macleod. This relates primarily to headcount, which the group can increase or cut relatively quickly in line with market conditions.
As well, Moelis suggests the earnings growth performance of Chandler Macleod reflects the successful integration of the RHD acquisition and strategic initiatives introduced over the past two years. This has improved the positioning of Chandler Macleod in contracting operations, meaning the company is less exposed to the more volatile permanent recruitment sector.
Chandler Macleod now has only around 16% of group earnings exposed to permanent recruitment on the numbers of Moelis. This is seen as a positive given this sector of the market has experienced a decline in activity levels of around 25% relative to the previous corresponding period.
The more recent AHS Services group acquisition, which was completed in February, is performing in line with management expectations according to Moelis. One positive is little in the way of branding and systems integration is required.
As well, given AHS Services is Australia's largest dedicated outsourced services provider in the domestic housekeeping market of around $1.2 billion, the deal will add $7- $8 million in profit before tax in FY13. This comes before plans to expand the business into markets such as New Zealand, Singapore and Hong Kong via Chandler Macleod's existing infrastructure.
Looking forward, Moelis sees strong growth through FY14 for Chandler Macleod, this from a solid pipeline of new business opportunities and a cost efficiency program expected to materialise from FY13.
Moelis's EPS forecasts for Chandler Macleod stand at 4.8c this year, rising to 5.9c in FY13 and 6.7c in FY14. This equates to an earnings multiple of 8.4 times this year, falling to 6.0 times in FY14. This implies value even allowing for a 20% share price increase since the interim result this year.
Dividends are also attractive, as on Moelis's forecasts for payouts of 2.7c this year, 3.3c in FY13 and 3.8c in FY14, yields would rise from 6.7% in FY12 to more than 9.0% in FY14. Dividends are currently fully franked.
Shares in Chandler Macleod today are unchanged in a weaker overall market, last trading at $0.42. This compares to a range over the past year of $0.285 to $0.47.
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