Australia | Oct 23 2008
By Chris Shaw
The slowing economic environment in Australia is impacting on all sectors, with even industries connected to government spending feeling the pinch, as evidenced by a downgrade in earnings guidance from IT player Oakton ((OKN)) at the group’s annual general meeting yesterday.
Outlook commentary at the meeting was very cautious, as while 1H09 earnings are now expected to be marginally above the first half last year and full year earnings in FY09 should beat those for the year recently completed, Credit Suisse notes this guidance is materially below what the market had previous expected.
Evidence the company is finding it tougher comes from staff numbers, as essentially revenue growth and therefore earnings can be tied to how many more staff the company employs to deliver on work on hand. There has been a drastic slowing in this measure, with GSJB Were noting numbers in the first quarter rose by only five employees.
This is well below previous indications FY09 would deliver around 200 new staff and the broker notes management yesterday made no mention of the outlook for the year now IT spending has become far more volatile thanks to the credit crisis.
AS UBS notes, while management is proposing a cost reduction program to offset lower growth in headcount additions, little success is likely here as cutting staff would mean lower revenues and fixed costs account for only around 6% of the group’s total costs. This implies downward pressure on margins in the broker’s view.
To reflect this, UBS has been quite severe in its earnings adjustments, taking 20% from its FY09 earnings per share (EPS) forecast and 35% off its previous estimate for FY10, meaning its adjusted forecasts are now 27.1c and 23.7c respectively. This suggests the broker doesn’t believe management’s guidance of slightly higher earnings in FY09 given EPS in FY08 was around 31c.
Others have been less severe in their earnings adjustments. GSJB Were has only cut its numbers by 7% in FY09 and 8.5% in FY10 to put its new EPS estimates at 31.5c and 34.8c respectively, while Merrill Lynch is at 30.6c and 31.4c and Credit Suisse expects EPS of 31.3c and 34.3c. The FNArena database shows consensus forecasts of 29.6c and 30.1c respectively.
Macquarie has pre-empted the AGM comments by earlier this week cutting its forecasts by more than 20% on the back of a report to the Federal Government suggesting reduced use of IT contractors. But in the view of Merrill Lynch, this threat has seen the stock oversold, as while the Acumen division is most impacted and accounts for around 20% of group revenues, it will be possible for the company to re-assign staff to other more profitable areas until conditions improve.
As a result the broker continues to rate the stock as a Buy, while overall the FNArena database shows a total of two Buys, one Accumulate, three Holds and one Sell recommendation.
The adjustments to forecasts have seen price targets cut and again UBS has been the most aggressive, lowering its target to $2.45 from $4.10, while Merrill Lynch has lowered its target 10% to $3.60 and GSJB Were has cut its by a similar percentage to $4.12. The database shows an average target now of around $3.10 against $3.85 previously.
Today, shares in Oakton are slightly weaker and as at 11.10am the stock was down 4c at $2.17. Its trading range over the past 12 months is $2.12 to $6.48.
