Solid Growth Expectations For SMS Management

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By Chris Shaw

IT services provider SMS Management & Technology ((SMX)) reported what UBS viewed as a strong full year profit result, earnings of $27.9 million coming in a little above the broker's $27.1 million forecast. Earnings in the second half were particularly strong, rising by 32% against a 16% increase in earnings on a full year basis.

The full year result was driven by an improvement in net margins, Credit Suisse seeing this as a reflection of improved utilisation and operational leverage. Macquarie agrees, noting utilisation rates for the full year were around 92%.

Operating conditions are also improving, this apparent in an increase in staff levels to 1,372 as at the end of June compared to 1,168 at the end of June last year. Despite this increase in staff levels, Macquarie notes overhead cost management was good as it remains a focus of management.

Cost pressures remain a major issue for the company according to UBS, particularly in relation to wage pressures. As SMS Management has a large base of project managers and consultants, wages are a risk as such services are not easily able to be outsourced offshore.

Major projects also appear to be picking up, Credit Suisse noting SMS had $280 million of bids being contested as at the end of the financial year. Given a sales to bill ratio of 1.2 times, the return to growth comments of management appear justified in the broker's view.

SMS Management should be able to comfortably finance the growth from new projects, Macquarie noting the company had net cash of $31 million on its balance sheet as at the end of June. This also offers scope for acquisitions, particularly in the managed services space where expansion attempts are underway.

Macquarie suggests the result shows strong demand across key vertical segments of the company's business is translating into a bounce back in top-line growth. In Macquarie's view this suggests SMS Management should continue to outperform the market over the medium-term, particularly given the solid earnings growth outlook.

This growth outlook is reflected in Macquarie's earnings per share (EPS) forecasts, which stand at 46.2c in FY11 and 53.2c in FY12, up from the 40c result in FY10. Credit Suisse is even more optimistic, forecasting EPS of 51.4c in FY11 and 56.9c in FY12.

UBS is not quite as aggressive in forecasting EPS of 47c and 50c respectively, while consensus EPS forecasts for SMS Management according to the FNArena database now stand at 48.3c in FY11 and 53.4c in FY12. Changes to earnings estimates post the result were relatively modest.

Credit Suisse's EPS forecasts imply earnings multiples of 11.1 times in FY11 and 9.7 times in FY12, while the broker suggests the earnings growth justifies a 30% premium to the Small Industrials Index. This implies respective earnings multiples of 12.1 and 17.8 times in FY10 and FY11, which underpins the broker's $8.10 price target for the stock.

This puts Credit Suisse ahead of the back with respect to price targets as the average target according to the FNArena database stands at $6.83, with BA Merrill Lynch the low marker with a target of $6.26. The average price target is unchanged from prior to the profit result. (Special note: BA-ML has just lifted its price target to $6.71 post the result).

Ratings for SMS Management remain positive, the stock scoring four Buys and one Hold rating. Shares in SMS Management today are stronger and as at 11.30am the stock was up 20c or 3.2% at $6.46. This compares to a range over the past year of $4.20 to $7.21 and implies upside of around 7.5% to the average price target in the database (uncorrected for the BA-ML update).

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