Small Caps | Jun 14 2011
– ASG Group suggests market conditions are improving
– Morgan Stanley expects this will support upgrades to consensus estimates
– Broker rates ASG Group as Overweight
– Upcoming FY11 result a likely positive catalyst
By Chris Shaw
When technology applications and business systems group ASG Group ((ASZ)) reported interim earnings in February, the result was seen as a mixed one. Brokers remarked cash flows in the period were weak and there were signs organic growth was continuing to decline. One positive comment came from RBS Australia, the broker suggesting a stronger second half performance was expected.
Results for the second half and full year for ASG Group are due next month and there has been some insight into performance in the period, thanks to a presentation at the recent Morgan Stanley Emerging Companies Conference.
As Morgan Stanley notes, the key point to come out of the presentation was unlike for many peers, which have experienced softness in operating conditions in the half, ASG Group remains on track to deliver on consensus earnings forecasts for the full year.
Morgan Stanley is forecasting earnings per share (EPS) of 9c this year and 10c in FY12, while consensus estimates according to the FNArena database stand at 9.1c and 10.1c respectively.
Management indicated ASG Group has won some incremental contracts in FY11, Morgan Stanley expecting these will provide some momentum heading into FY12. There has also been a pick up in contracts associated with infrastructure managed services contracts, implying a generally stronger 2H11 performance.
There is solid evidence to support the view ASG Group's markets are strengthening, as Morgan Stanley notes the pipeline for such contracts already exceeds that of FY11. This is thanks in large part to an increase in Federal government engagements.
With conditions looking improved Morgan Stanley sees the upcoming full year result for ASG Group as a likely share price catalyst. This is because the result should show a strong outcome relative to peers in terms of not only headline earnings but cash flows as well.
Factoring in acquisitions made during FY11 and some incremental contracts wins reported by ASG Group, Morgan Stanley expects some upgrades to market earnings forecasts. This is enough for Morgan Stanley to rate ASG Group as Overweight, within an In-Line view on Australian emerging companies.
The positive view of Morgan Stanley is largely in line with brokers in the FNArena database covering ASG Group. This shows two Buy recommendations and one Underperform. As noted above, the three ratings date back to ASG Group's interim result in February. Regular updates on ASG Group are unlikely given the company has a market capitalisation of around $170 million at current levels.
Morgan Stanley has a price target for ASG Group of $1.35, while the consensus target according to the database is $1.21. This reflects a target of $0.89 for BA Merrill Lynch, as both UBS and RBS Australia have targets close to that of Morgan Stanley.
Shares in ASG Group today are slightly weaker and as at 1.55pm the stock was down 2c at $0.965. Over the past year ASG Group has traded in a range of $0.905 to $1.55.
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