Small Caps | Jun 27 2012
– Moelis rates UXC as a Buy
– Company well placed to compete with multinationals in IT sector
– New contracts to boost earnings
– Stock attractively valued at current levels
By Chris Shaw
The IT services environment has been challenging for some time, wiith companies in the sector struggling as customers have postponed or decided to cancel IT spending.
UXC ((UXC)) operates in this sector, offering business solutions and applications and IT consulting services to medium to large entities in both the private and public sectors. With a market capitalisation of around $175 million, UXC receives little coverage in the market. There is no coverage from the eight brokers in the FNArena database.
One broker to cover the stock is Moelis, which rates UXC as a Buy with a price target of $0.65. UXC is currently the only Australian IT play carrying a Buy rating from Moelis, with the stockbroker viewing the company as a viable alternative to multinationals in terms of winning larger size contracts given the scale and breadth of the services offered by UXC.
Recent evidence supports this, as this month UXC has announced a number of new and significant key strategic contracts with Transport for NSW, Hills Industries ((HIL)), GrainCorp ((GNC)) and Toyota. Moelis estimates these contracts are valued at $34 million over the delivery period, most of which are within two years. Further contract wins are possible given results of a number of other major tenders are yet to be announced.
A meeting with management confirmed to Moelis current earnings guidance of an EBITDA (earnings before interest, tax, depreciation and amortisation) result well ahead of the $15.3 million delivered in the previous corresponding period as realistic. Consensus EBITDA forecasts for the full year project a result of better than $30 million. This implies earnings per share (EPS) growth of 8-10% reports Moelis.
Further growth in earnings remains possible as Moelis notes all divisions in UXC are current operating below optimal utilisation rates. This is evident from profit before tax margins, which for consulting stand at 6.4% against a stated medium-term target of 12%, while applications are delivering 9% against a target of 11%.
Cost cutting should also support earnings growth, Moelis noting some cost out measures such as staff cuts have now been fully implemented and should deliver around $10 million in gross cost savings for UXC.
This expected earnings growth is reflected in the forecasts of Moelis given the expectation for EPS of 5.4c this year, rising to 6.4c in FY13 and 7.6c in FY14. This forecast translates to a FY13 earnings multiple of less than nine times.
For Moelis, such a multiple is undemanding given UXC is well positioned to delivered sustained earnings growth in coming years. This supports the Buy rating, notwithstanding the fact UXC shares have risen by 40% year to date this year.
Adding to the investment equation is an attractive yield. On Moelis's dividend expectations of 2.8c this year, 3.3c in FY13 and 4c in FY14, UXC should yield 5% in 2012, 6% in FY13 and more than 7% in FY14. Dividends are expected to be fully franked.
Shares in UXC closed yesterday at $0.555, which compares to a range over the past year of $0.385 to $0.70.
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