Australia | Mar 27 2012
– Skilled Group delivered a strong interim result
– Further earnings to come from efficiencies, exposure to resource sector
– Moelis rates Skilled as a Buy
By Chris Shaw
Among companies to report interim results last month, Moelis suggests Skilled Group ((SKE)) delivered one of the highest levels of positive earnings surprise. Underlying earnings before interest and tax (EBIT) rose by 22% in the half, this on 3% revenue growth to $900 million.
Moelis notes earnings margins also rose during the period to 4.2% from 3.5% previously, the improvement reflecting both an internal efficiency program and a renewed focus on higher quality revenue streams.
Management at Skilled had set a target of around $12 million in annualised cost savings by the end of FY13 but Moelis points out this target may actually be achieved by the end of this year. On top of this is the potential to now capture additional savings in relation to an improvement in back office processing.
Aside from cost savings, Moelis expects solid earnings growth from Skilled's exposure to the oil and gas and mining segments, where there continue to be high levels of activity in both mining and infrastructure projects.
Skilled is well placed to benefit from this activity as Moelis notes 28% of group revenues come from the oil and gas sector and 22% from the mining sector. As well, 42% of Skilled's headcount is located in Western Australia, where the skills shortage is most significant. Skilled meets this need as Australia's largest national supplier of skilled tradesmen.
The positive industry factors support Moelis's view margins for Skilled can continue to increase from the 4.2% achieved in 1H12. Assuming margins could increase to around 5%, Moelis estimates earnings in FY14 would be about 18% higher than currently forecast.
Moelis is forecasting earnings per share (EPS) for Skilled of 20.9c this year and 24c in FY13, this compares to the 13c earned in FY11. Moelis's estimates compare to consensus EPS forecasts according to the FNArena database of 21.2c and 23.7c respectively.
On its forecasts, Moelis estimates Skilled is trading on a FY12 earnings multiple of less than 11 times. This is undemanding given the positive macro thematics in place and the benefits of the efficiency program being implemented. Given this, Moelis sees scope for a sustained re-rating over the next six to 12 months.
This is enough for Moelis to rate Skilled Group as a Buy, a rating matched by the three brokers in the FNArena database providing coverage. RBS Australia's positive view is based on similar reasons to Moelis, being the expectation of continued earnings growth from a positive macro environment and higher margins. RBS also sees valuation as attractive at current levels.
Macquarie and Deutsche Bank also have Buy ratings on Skilled, both brokers having lifted earnings forecasts and price targets post the interim result last month. The database shows targets for Skilled range from Deutsche at $2.40 to RBS Australia at $2.70, while Moelis has a target of $2.85.
Shares in Skilled Group today are slightly weaker, down 1c at 11.10am at $2.28. This compares to a range over the past 12 months of 1.60 to $2.42. The current share price implies upside of almost 8% to the consensus price target in the FNArena database of $2.51.
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