Australia | Feb 10 2011
By Chris Shaw
Human resources and employment services group Talent2 International ((TWO)) reported an interim profit of $3.4 million, a result that was 85% higher than for the previous corresponding period.
Stockbroker Moelis suggests Talent2 was a beneficiary of sustained improvement in employment activity across the Asia Pacific region, this trend having been in place since late in 2009. The interim result showed revenue growth of 36% and EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 61%.
Talent2 has two main divisions – Recruitment and Managed Services, and both performed well during the period. Recruitment, which accounts for 41% of group revenues, delivered a 58% increase in EBITDA, while Managed Services, which generates the balance of group revenues, recorded a 61% increase in EBITDA.
RBS Australia was particularly positive on the performance of the Managed Services division, suggesting it shows a recovery in earnings for that part of the business is now underway. The division also offers good potential for further growth in the broker's view, as there is more upside from client wins via RPO outsourcing operations and via the expansion of existing mandates.
As well, RBS Australia points out a reconfiguring of the Payroll business towards small and medium-sized businesses has improved demand for the service, while also generating some scale benefits from an increase in payslips.
Talent2 is on a solid footing to finance further growth, Goldman Sachs noting post the December half the group had a strong balance sheet with net debt of $8.5 million and free cash flow of $5.6 million. The latter was an increase of 86%, reflecting good working capital control and the strong earnings growth achieved in the period.
International markets are one likely source of further earnings growth in the view of Goldman Sachs, reflected in the fact these operations generated a 61% increase in revenues to $28 million in the December half. The international businesses now account for 19% of Talent2's total revenues.
On the back of Talent2's interim, RBS Australia has lifted its earnings per share (EPS) forecasts by 2-6% through FY13, meaning its estimates now stand at 10.6c this year, 14.3c in FY12 and 16.8c in FY13. RBS Australia is the only broker in the FNArena database to cover Talent2.
Moelis has made no changes to its estimates, which stand at 10.4c, 13.2c and 15.2c respectively, while Goldman Sachs is forecasting EPS outcomes of 10.2c, 14c and 16.9c for FY11-FY13.
Based on its forecasts, Goldman Sachs estimates Talent2 is trading on an earnings multiple of 15.7 times this year and 11.4 times in FY12. The broker sees this as attractive given the earnings growth outlook and to reflect this it has upgraded to a Buy rating, from Hold previously.
RBS Australia has also upgraded to a Buy rating from Hold previously, again on valuation grounds. RBS's numbers suggest a FY12 earnings multiple of 11.2 times, which would be in line with the Small Industrials average according to the broker. This implies the stock is relatively cheap given a historical multiple premium of around 25%.
Post Talent2's interim, Moelis makes no change to its Buy rating, the broker setting its price target at $2.00. This is broadly in line with the targets of RBS Australia and Goldman Sachs, which stand at $1.95 (up from $1.53) and $2.05 respectively.
Shares in Talent2 today are higher and as at 12.35pm the stock was up 5.5c or 3.4% at $1.655. This compares to a trading range over the past year of $1.25 to $1.75 and implies upside of around 20% relative to the average price target for the stock among the three brokers.
