Small Caps | Aug 16 2012
– Chandler Macleod delivers solid profit result
– Recent acquisitions gave a boost, market share gains achieved
– Focus on efficiency and productivity to increase margins
By Chris Shaw
Last month stockbroker Moelis & Company identified human resource and employment services group Chandler Macleod ((CMG)) as a Buy given a positive earnings growth outlook and an attractive yield (See: Chandler Macleod: Yield And Growth). Post a solid profit result the broker has retained its view on the company.
Chandler Macleod delivered underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $42.2 million, which was in line with previous earnings guidance. In earnings per share (EPS) terms the result translated to growth of 25% from FY11.
Moelis notes revenue for FY12 increased by 32%, with the acquisitions of AHS Services and RHD providing much of the increase given underlying revenues improved by 9% for the year. This was seen as a good result given subdued economic conditions and indicated Chandler Macleod continues to boost market share across most segments.
Management at Chandler Macleod has indicated the economic environment is unlikely to improve in the near-term as clients continue to look for savings. Despite this, Moelis notes the indication is for sustained earnings growth thanks to a solid product offering and expected margin improvements from efficiency and productivity gains over the next 12-18 months.
Underlying EBITDA margins for FY12 of 2.7% were flat on the previous corresponding period given some competitive tender pricing in the period but Moelis sees this margin as being the low point of the cycle given the expected efficiency gains.
For Moelis this translates to further solid earnings growth, as EPS is forecast to increase to 5.9c in FY13 and 6.7c in FY14 from the 4.9c achieved in FY12. This growth will be in large part driven by an incremental contribution from AHS for the full year, while underlying earnings should also deliver some growth assuming no further deterioration in the domestic economy.
The other supportive factor for the earnings outlook for Chandler Macleod according to Moelis is the business has been repositioned over the past two years towards more resilient sectors of the economy. As an example, the broker points out Chandler Macleod now generated around 21% of group revenues from the still strong resources sector.
Looking forward, Moelis continues to see growth opportunities from the AHS Services acquisition as the business requires minimal integration and there are options for establishing footprints in the New Zealand, Singapore and Hong Kong markets.
Shareholders will also be rewarded with solid dividends. Moelis is forecasting payouts of 3.3c for FY13 and 3.8c in FY14, which implies a fully franked yield of 7.8% for the current year and 8.8% in FY14.
On the forecasts of Moelis, Chandler Macleod is trading on a FY13 earnings multiple of around seven times for FY13. Even allowing for an increase in the share price of around 20% so far this year, this multiple is regarded as attractive given the growth options on offer.
Shares in Chandler Macleod today are slightly weaker in a stronger overall market and as at 11.40am the stock was down 0.5c at $0.42. This compares to a trading range over the past year of $0.30 to $0.47. Moelis has a price target on Chandler Macleod of $0.52.
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