Small Caps | Oct 06 2011
– Strong management highlight for Lycopodium
– Earnings growth and dividends also attractive
– DJ Carmichael initiates with a Buy rating
By Chris Shaw
Lycopodium ((LYL)) was established in 1992 as a consulting engineering company and has since developed to focus on the delivery of EPCM (Engineering, Procurement and Construction Management) consulting services to what is now a global client base.
In the view of stockbroker DJ Carmichael, this growth has been aided by one of the better management teams in Australia. The capability of management has allowed Lycopodium to successfully diversify earnings across clients, project type, geography, industry and commodity.
Growth has not come at the expense of financial health, DJ Carmichael noting Lycopodium has a strong balance sheet with net cash of around $24 million. Returns on assets have also been consistently strong for a number of years, while earnings per share growth since FY05 has averaged 17% per annum.
With Lycopodium generating solid cash flow there has been scope for dividend increases and DJ Carmichael sees the yield as attractive at a forecast of 6.3% in FY12 and 7.0% in FY13. Dividends are currently fully franked.
This estimate is based on DJ Carmichael's earnings per share (EPS) forecasts of 48.6c in FY12 and 53.8c in FY13. This compares to EPS forecasts of Macquarie, the only broker in the FNArena database to cover Lycopodium, of 50.6c and 54.7c respectively.
There appears limited downside risk to the earnings estimates of DJ Carmichael as Lycopodium has not only offered guidance for both years but has a material percentage of revenue for both FY12 and FY13 already locked in.
This offers another advantage according to DJ Carmichael in that it will allow management to be more selective in regards to the new projects taken on over the next 12-18 months.
Earnings risk is more to the upside as DJ Carmichael expects a combination of consistent organic growth, expansion into new regions and industries and further acquisitions. Any such acquisitions are expected to be bolt-on type deals that allow Lycopodium to expand its product offering into new areas.
What may constrain growth going forward is the ongoing objective of management to execute projects and studies to a consistently high standard. As DJ Carmichael notes, this approach required good quality staff and in the current market acquiring such staff is a more difficult proposition.
Given the positive outlook for Lycopodium, DJ Carmichael has initiated coverage on the stock with a Buy rating. Price target has been set at $6.20. Macquarie similarly has an Outperform rating on the stock with a comparable price target of $6.36. Macquarie's target was increased in August to reflect increases to earnings forecasts following a better than expected full year profit result.
Shares in Lycopodium today are unchanged as at 1.20pm with a last sale at $5.65. This compares to a trading range over the past year of $3.91 to $7.42. The current share price implies upside of around 12% to the price targets of Macquarie and DJ Carmichael.
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