Small Caps | Apr 11 2012
– Goldman Sachs downgrades Oakton to Neutral
– Change reflects recent share price strength
– Downgrade supported by ongoing earnings concerns
By Chris Shaw
Shares in IT play Oakton ((OKN)) have risen 16.5% since the middle of January, which is significant outperformance relative to a 3.6% increase in the S&P/ASX200 Index over the same period.
The gains in the Oakton share price have prompted Goldman Sachs to downgrade to a Neutral rating citing valuation grounds. Supporting the move is the broker's view earnings risk remains to the downside.
This reflects both a continued shift towards project work for IT providers as corporate spending remains tight in the current environment and a soft environment for new IT projects in general. On the plus side, Goldman Sachs expects this shift will build greater earnings visibility for Oakton in the longer-term.
Given the recent share price appreciation, Oakton is now trading on a FY13 earnings multiple on Goldman Sachs's forecasts of 9.5 times. This is in line with IT services peers and further supports the broker's downgrade to a Neutral rating.
The change in rating brings Goldman Sachs into line with brokers in the FNArena database covering Oakton, as the database shows a perfect five-for-five Hold ratings. Ratings had been somewhat more positive but both Credit Suisse and UBS downgraded from Buy recommendations post Oakton's interim profit result in February, which came in weaker than the market had forecast.
Where Goldman Sachs remains more positive is with respect to price target, as despite the downgrade in rating the broker's target is unchanged at $1.55. This is well above the consensus price target according to the FNArena database of $1.20, with targets in the database ranging from Macquarie at $1.11 to UBS at $1.40.
Despite similar ratings brokers covering Oakton offer somewhat different commentary on the stock. Macquarie suggests the weak interim result and a number of earnings disappointments in recent years mean investors are likely to remain sceptical on the outlook for Oakton until management can prove otherwise.
RBS Australia is a little more positive, viewing a strong balance sheet as a positive and regarding Oakton as well placed to benefit from any recovery in both macro and IT market conditions. At the same time, RBS concedes earnings risk for Oakton remains to the downside at present.
Goldman Sachs also sees scope for upside longer-term for Oakton, this stemming largely from potential benefits from new technology in the IT services sector. Examples of this new technology include virtualisation, cloud computing, mobility and Software as a Service (SaaS).
Following the downgrade in rating Goldman Sachs has now removed Oakton from its Australia/New Zealand Buy list.
Oakton shares today are weaker in an overall weaker share market. As at 12.15pm the stock was down 10c at $1.38. This compares to a trading range over the past year of $1.065 to $2.57, the current share price implying downside relative to the consensus price target in the FNArena database of around 14%.
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