Australia | Dec 06 2010
By Chris Shaw
As part of a review of the Australian IT services sector, Morgan Stanley has initiated coverage on outsourcing services group Talent2 International ((TWO)), rating the stock as Overweight within a positive view towards the sector overall.
For Morgan Stanley, one attraction of Talent2 is a proven capacity to expand a recruitment business to a meaningful scale, while there is also leverage to a recovery in the Australian labour market. As well, Talent2 offers a less cyclical “stay in business” earnings stream, which offers a defensive portion to earnings.
As Morgan Stanley points out, Talent2 is heavily exposed to permanent placements, where conditions are recovering since the global financial crisis but remain below the levels recorded in 2008. Where Talent2 has an advantage is its ability to cross-sell, as its client services extend to payroll, training and human resource functions.
This supports Morgan Stanley's expectations of double digit earnings growth, the broker's forecasts in earnings per share (EPS) terms standing at 10c in FY11 and 13c in FY12. The FNArena database shows only RBS Australia covers the stock and its EPS forecasts are similar at 10.3c and 13.4c respectively.
RBS Australia rates Talent2 as a Hold, as while the full year profit result earlier this year was a little better than it had expected, the broker remains cautious on the outlook for the group's managed services and outsourcing operations.
Based on its earnings forecasts, Morgan Stanley has set a $2.00 price target on Talent2, which is well above RBS Australia's target of $1.53. Morgan Stanley sees its target as achievable given Talent2 should deliver three year capitalised annual sales growth of 14% from FY11, three year capitalised annual earnings growth of 45%, while offering a "respectable" dividend yield of 3.0% in FY11.
The Morgan Stanley price target implies a forward earnings multiple of 11 times, which the broker notes is a slight discount to industry peers. It would also be a discount to the company's historical earnings multiple of around 16 times.
Shares in Talent2 are untraded today, the last sale price of the stock being $1.505. Over the past year the shares have traded in a range of $1.17 to $1.64.
