Australia | Oct 25 2010
By Chris Shaw
Recruitment and managed services group Talent2 International ((TWO)) posted revenue of around $243 million in FY10 but management expects significant growth in coming years given an aspirational goal for revenues to reach $1 billion by 2013.
According to stockbroker Moelis, Talent2 is well on the way to achieving or at least getting close to this goal. A meeting with management last week indicated the company has enjoyed a significant rebound over the last 12 months in both its Australian and Asian operations.
In the recruitment operations, which accounts for 44% of group revenues, Moelis notes the Australian operations are recording month-to-month improvement as macro conditions remain good. Even better performance is coming from the Asian recruitment business thanks to the combination of good economic conditions and the emergence of some brand name recognition.
Headcount in the recruitment business is also improving, leading Moelis to suggest EBITDA (earnings before interest, tax, depreciation and amortisation) for the division could return to pre-2008 levels of around $12 million. This compares to the $7.1m in EBITDA earned in FY10.
Additional work from existing clients is seeing the managed services division deliver what Moelis regards as good growth in the first quarter of 2011. This improvement comes despite some delays with respect to decision making from potential multinational clients reflecting uncertainty with respect to the global economic outlook. Managed services currently account for 56% of Talent2's annual revenues.
Winning new contracts remains a potential key driver of earnings in coming years, as Moelis notes Talent2 management sees scope for earnings margins to increase to better than 20% in EBITDA terms over the next three years. This compares to an EBITDA margin in the division of around 9% in FY10.
One way new business should be generated is via Talent2's recently awarded exclusive global partner status with US recruitment company Allegis. Under the agreement, Talent2 will provide services to Allegis in the Asia-Pacific region, a deal Moelis expects will result in a number of new contracts.
Talent2's share price has increased by around 20% over the past quarter, but Moelis continues to see value in the stock despite the recent gains. On the broker's numbers, earnings per share (EPS) for Talent2 are expected to come in at 10.4c this year and 12.9c in FY12, which implies earnings multiples of 15.2 times in FY11 and 12.3 times in FY12 (at the current share price).
Moelis's forecasts don't appear overly aggressive given the only broker to cover Talent2 in the FNArena database, RBS Australia, is forecasting EPS of 10.3c this year and 13.4c in FY12.
Moelis suggests its forecast earnings multiples are not onerous given the outlook for sustained strong earnings growth over the next few years. Supporting this view is the advantage offered by first mover status in Talent2's managed services operations in Asia and that the company is the highest quality listed Australian recruitment company in the view of the broker.
Post the update with management Moelis retains its Buy rating on Talent2, which compares to a Hold rating from RBS Australia. RBS's rating is a valuation call, while the broker has a price target on the stock of $1.52. This is broadly in line with the current share price. Goldman Sachs is not part of the FNArena database but also has a Hold recommendation on Talent2 at current levels.
Over the past year the share price of Talent2 has traded in a range of $1.17 to $1.66, while today the stock as at 10.45am was down 3c at $1.56.
