UxC To Unlock ‘Hidden Value’

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– IT group UXC looking to offload Field Services division
– Divestment could clear debts, leaving the core IT division debt free
– Solid earnings growth expected for core IT operations
– Moelis rates UXC as a Buy, sees significant 'hidden value'

By Chris Shaw

Management at IT and consulting group UXC has made the strategic decision to either divest or go through a separate listing for the company's Field Services division. The process is already underway, stockbroker Moelis noting information memoranda have been distributed to interested parties and indications of possible interest are likely within the next month.

As Moelis points out, the Field Services division delivered EBITDA (earnings before interest, tax, depreciation and amortisation) of $5.8 million in the first half of FY11. Management expects the division will deliver EBITDA of $14-$16.5 million for FY12 as a whole.

Assuming an earnings multiple of around four times, Moelis suggests a sale of the division could generate proceeds for UXC of $50-$60 million. Given UXC has a current enterprise value of around $220 million, which includes about $50 million in debt, the sale of the division could leave the core IT Services division debt free with an enterprise value of about $170 million.

The IT Services division is expected to continue to win new contracts, which supports what Moelis views as a positive growth profile through FY13. The division is expected to generate revenues of around $500 million and EBITDA of about $38 million in FY11, with EBITDA for the first half coming in at $18 million.

Currently Moelis is forecasting earnings per share (EPS) for UXC of 5.8c this year, rising to 8.3c in FY12 and 9.5c in FY13. With a market capitalisation of around $170 million at current levels no broker in the FNArena database covers UXC, so there is little basis for comparison with respect to earnings forecasts.

With this as a starting point, and assuming management is accurate in the expectation of double digit earnings growth in FY12, Moelis's estimate for EBITDA in FY12 is a result of around $42 million. This would given an EV/EBITDA multiple of around four times, EV being Enterprise Value.

Moelis argues such an EV/EBITDA multiple significantly undervalues UXC, particularly relative to peers in the sector. As an example, Moelis points out SMS Management and Technology ((SMX)) is trading on a forecast multiple of more than seven times for FY12. 

This suggests to Moelis there is significant hidden value in the UXC share price, even allowing for the fact UXC shares have risen by more than 20% so far in 2011. Assuming the sale or divestment of the Field Services division goes ahead, Moelis expects improved earnings clarity with respect to FY12. This is likely to act as a further catalyst for the share price, the stockbroker speculates.

Given this, Moelis rates UXC as a Buy, with a price target of $0.70. Shares in UXC today are slightly higher and as at 10.40am the stock was up 1c at $0.55. Over the past year UXC has traded in a range of $0.435 to $0.735.
 

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