Morgan Stanley Adds CPB, IMD, CSV And SAI

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This story features IMDEX LIMITED.
For more info SHARE ANALYSIS: IMD
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Over the past few weeks Morgan Stanley has expanded its coverage of the smaller end of the Australian share market, a process that has continued today with the broker initiating coverage on a further four companies, all with Overweight ratings. In each case the rating compares to an In-Line industry view.

The four companies are analytical services provider Campbell Brothers ((CPB)), IT services group CSG Limited ((CSV)), drilling products supplier Imdex ((IMD)) and global standards, assurance and compliance provider SAI Global ((SAI)).

For Cambell Brothers, Morgan Stanley has set its price target at $40.00, which implies 34% upside from current levels. Significant share price gains are expected as an improving outlook in the Minerals sector is seen as delivering incremental earnings increases in the core ALS or laboratory services division.

Here Morgan Stanley expects at least three years of better than 20% earnings growth, helped not only by improving conditions but an incremental contribution from further acquisitions. As well, Morgan Stanley likes the potential for earnings to receive a boost from the continued evolution of the environmental and non-minerals testing businesses of Campbell Brothers.

While FY10 earnings will be down about 30% compared to FY09 at around $75 million, Morgan Stanley suggests it will still be a high quality result. The stockbroker also sees the result as offering a better pointer to sustainable earnings. Over at Macquarie, analysts have noted the stronger Australian dollar is a key driver of earnings weakness at present, but revenues should recover in coming years.

In FY11 the outlook is better, Morgan Stanley expecting net profit will be higher than the record $106 million recorded in FY09. In earnings per share (EPS) terms Morgan Stanley is forecasting results of 125c this year, 179c in FY11 and 226c in FY12.

This compares with consensus estimates according to the FNArena database of 132.8c this year and 184c in FY11. The database shows Campbell Brothers is rated as Buy six times and Hold once.

UBS today lifted its earnings estimates for Campbell Brothers on the expectation of higher volumes for ALS as mining activity levels increase. The average price target according to FNArena stands at $33.79, UBS lifting its target by $2.00 to $34.00. Based on the average price target there is a little more than 12% implied share price upside in Campbell Borthers.

Keeping on the resource sector theme, Morgan Stanley likes Imdex as it sees group profitability improving as minerals drilling increases and as the company brings a new suite of instrumentation tools for oil and gas drilling to the market.

According to Morgan Stanley, there is mounting evidence, both anecdotal and empirical, to suggest drilling activity can approach previous record levels in coming years. Together with forecasts of improved utilisation of Imdex's tools, this supports Morgan Stanley's earnings growth expectations.

In EPS terms the company is forecast to generate earnings of 4c this year, 9c in FY11 and 12c in FY12. These are enough to justify a $1.20 price target for the stock. The FNArena database shows no coverage of Imdex. BA-ML and Citi used to cover the shares, but both seem to have abandoned it. GSJB Were, on the other hand, at present rates the stock Hold in combination with a price target of $1.03.

Turning to the IT Services sector, Morgan Stanley is attracted to the solid organic growth profile it sees for CSG Limited, along with the scope for a significant geographical expansion of the existing business.

To reflect this, Morgan Stanley expects annual earnings growth of 15% through to FY15, with risk to the upside from executing a more aggressive business plan in the New Zealand print business and entry into the Sydney and Melbourne markets.

CSG has a high level of contracted revenue, so Morgan Stanley suggests the announcement of additional contract wins is likely to see a positive share price reaction. Its EPS forecasts stand at 16c this year, 20c in FY11 and 24c in FY12, while consensus estimates according to the FNArena database stand at 15.1c in FY10 and 19.6c in FY11.

The database shows CSG is rated as Buy twice and Hold once with an average price target of $2.30, while Morgan Stanley has set its price target at $3.00. At curent levels the stock offers a little less than 4% upside to the average price target.

SAI Global is forecast by Morgan Stanley to deliver annual net profit growth of 17% through 2013, driven by a combination of organic growth across publishing, compliance and assurance businesses and margin expansion as the company integrates its property business. As well, there will be growing contributions from recent acquisitions with scope for additional deals going forward.

Morgan Stanley's growth forecasts are based on an expectation of 6% annual organic revenue growth, though risk here is to the upside if SAI can ramp up its property outsourcing operations. Earnings are relatively defensive given many of SAI's demand drivers are dictated by legislation or industry recommendations and around 60% of annuity income streams are from subscriptions and contract renewals.

These forecasts imply EPS outcomes of 20c this year, 25c in FY11 and 29c in FY12. Consensus EPS estimates according to the FNArena database stand at 23c in FY10 and 27.5c in FY11.

SAI Global is rated as Buy seven times and Hold twice, with the average price target according to the database standing at $4.39, implying just over 2% upside from current levels. Morgan Stanley has set its target at $4.90.

In trading today, Campbell Brothers shares are down 5c at $29.95 compared to a range over the past year of $15.55 to $32.00, while Imdex is down 0.5c at $0.78 against a range of $0.37 to $0.96. CSG Limited shares today are down 4c at $2.21, having traded between $0.67 and $2.30 over the last year, while SAI Global is 3c weaker at $4.29 against a range of $2.55 to $4.53. The share market overall is having difficulties to remain in positive territory despite a positive lead from Wall Street overnight.

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