Australia | Aug 18 2011
– SAI Global delivers better than expected profit result
– Guidance for FY12 positive, acquisitions also expected to deliver growth
– Earnings estimates lifted, Citi upgrades to a Buy rating
By Chris Shaw
Standards and compliance group SAI Global ((SAI)) yesterday delivered a 42% increase in net profit to $48 million, a result above most expectations in the market. Earnings growth was helped by the acquisition of Integrity Interactive during the period and organic growth from the Assurance and Information Services division.
In terms of divisional performance, Citi notes the Compliance division performed better than expected following the Integrity Interactive acquisition, while the Assurance division performed very well and lifted margins by 250-basis points relative to the previous year. On the flip side, Citi notes Information Services struggled amid a weak property market and the stronger Australian dollar.
Along with the result management at SAI Global delivered what UBS viewed as positive outlook commentary, with expectations for further organic sales growth and margin expansion in FY12. In UBS's view this positive commentary highlights the resilience of SAI Global's business.
On the back of the full year result and the comments provided by management, UBS and others in the market have lifted earnings forecasts in coming years. In earnings per share (EPS) terms UBS has lifted its forecasts by 4-5% through FY14, while Citi's forecasts have increased by 5% this year and by 2% in FY13. Consensus EPS forecasts according to the FNArena database now stand at 30.6c for FY12 and 35.7c for FY13.
As Macquarie notes, the fact most of SAI Global's revenue streams are annuity and non-discretionary in nature means FY12 should deliver another year of double-digit earnings growth. This growth should be complemented by further acquisitions, given the offshore operations of SAI Global are presently somewhat immature.
Acquisitions should be helped by a strong balance sheet, Citi noting as at the end of FY11 cash on hand had increased by 56% to $52.3 million. Along with acquisitions RBS Australia sees scope for growth via new products, while also expecting SAI Global will take advantage of opportunities to lift market share in areas such as the food safety division.
The other advantage in terms of earnings growth highlighted by UBS is SAI Global enjoys leading positions in global markets and its operations are scalable. This leaves the group well placed to benefit from a continuation of the trend towards outsourcing within financial services, as well as from the ongoing burden of increased Governance, Risk and Compliance obligations faced by many companies.
Following SAI Global's profit result there has been only one change in rating, Citi upgrading to a Buy recommendation from Hold previously. This upgrade is a valuation call, as on Citi's numbers SAI Global is trading on a FY12 earnings multiple of 14.5 times, which is a discount to the five year average multiple of 15.7 times.
The upgrades brings Citi into line with the recommendations of the other brokers in the FNArena database covering SAI global, as the database now shows a perfect seven-for-seven Buy ratings. The consensus price target for the stock is $5.48, up from $5.43 prior to the result.
Shares in SAI Global today are slightly weaker and as at 12.15pm the stock was down 2c at $4.58. This compares to a trading range over the past year of $3.84 to $5.15. The current share price implies upside of around 19% relative to the consensus price target in the FNArena database.
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