Small Caps | Jul 03 2012
– Credit Suisse initiates with an Outperform rating on Skilled Group
– Earnings growth certainty one attraction
– Adds to consensus Buy ratings from brokers covering Skilled
By Chris Shaw
Prior to last week all three of the brokers in the FNArena database to cover outsourced labour and workforce services provider Skilled Group(SKE)) rated the stock as a Buy, with price targets ranging from 2.40 to $2.70. These ratings date to last February following the company's interim result release. Credit Suisse has now added to coverage by initiating on the stock with an Outperform rating and a $2.60 price target.
One attraction for Credit Suisse is that Skilled offers greater earnings certainty in coming years than most of its Small Industrial peers. This growth, which the broker forecasts will be 11% capitalised annual growth in earnings per share for FY12 through FY15, will come from a mix of sources.
One is an ongoing turnaround story, as management of Skilled are in the process of stripping out excess costs from the business. The second is lower interest payment requirements stemming from a stronger balance sheet, which again reflects the benefits of the turnaround strategy initiated in 2010.
As well as boosting earnings, the combination of lower interest payments and stronger cash flows should support ongoing increases in dividend payouts in the view of Credit Suisse. This should support yields, which are forecast at 4.1% in FY12 and 5.2% in FY13. Dividends are currently fully franked.
Looking forward, Credit Suisse expects Skilled will continue to deliver reasonable top-line growth, thanks in particular to strong positions in key end markets. Earnings for Skilled are weighted to the oil and gas and mining sectors and include LNG and major iron ore projects, while the outlook for the utilities and road infrastructure markets are also solid in Credit Suisse's view.
In terms of forecasts, Credit Suisse expects earnings per share (EPS) for Skilled of 20.1c this year and 22.5c in FY13. These estimates compare to consensus EPS forecasts according to the FNArena database of 21c and 23.4c respectively.
Risks to the forecasts of Credit Suisse are primarily macro-based in the broker's view and include further Eurozone uncertainty and changes to commodity prices. Offsetting this, most of Skilled's clients are top-tier, which implies less risk to earnings.
Based on its forecasts, Credit Suisse estimates Skilled is trading on a FY13 earnings multiple of 10.5 times, which is a slight discount to the Small Industrials. This is despite the fact consensus earnings revisions for Skilled are around +9% against slightly negative revisions for the ASX Small Industrials.
Elsewhere in the market, RBS Australia's Buy rating is supported by the expectation margins in Skilled's businesses will improve, particularly given expectations the macro environment will improve over time.
Macquarie and Deutsche Bank are the other brokers in the FNArena database to cover the stock and agree with Credit Suisse there is value in Skilled at current levels.
Shares in Skilled closed yesterday at $2.36, which compares to a range over the past 12 months of $1.60 to $2.50. The share price implies upside of around 7% relative to the consensus price target of $2.53 in the FNArena database.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
