Australia | Aug 16 2013
-Worst may have passed
-Weaker AUD a strong aid
-Return to better growth seen
By Eva Brocklehurst
The latest results from SAI Global ((SAI)) were welcomed with relief by brokers. The information services and standards auditor has finally reached a point where, having ploughed along the bottom of expectations for some time, there's a large repository of hope now that the worst has passed.
Deutsche Bank, upgrading to Buy from Hold, notes the investment case is de-risked because the risk/reward balance has altered, given improving growth and margin outlook for information and assurance services while compliance division client issues have stabilised. There is also a more robust compliance platform being implemented. On valuation, the stock offers 20% upside potential to the broker's revised price target and it is trading on 14 times forecast FY14 earnings, a discount to the market which is trading at 15 times.
The stock has five Buy, two Hold and one Sell rating on the FNArena database. There was a swag of upgrades in the wake of the result. All four moved from the Hold to Buy categories, suggesting the balance of factors in favour of the stock has indeed shifted.The consensus target price of $4.34 suggests 1.0% upside to the last share price. The consensus target has moved up from $3.97 ahead of the result.
So, what did it for brokers? The results revealed revenue growth of 6%. Information services was the highlight, with 10% earnings growth, but assurance was still soft, down 3%, while compliance was up 1%. It's the outlook that really delivered. Drivers are seen as continued strong growth in subscription revenue for information services, new business wins in both information and property services, a full year contribution from ANZ and Commonwealth Bank contracts, a return to trend growth of 5-7% in assurance services and last, but not least, the favourable Australian currency movement.
Credit Suisse thinks the fall in the Australian dollar came at the right time. Operationally, the results were a bit weaker than the broker expected and might not have clinched an upgrade (Outperform from Neutral) if it were not for a sizeable second half reduction in corporate services costs. In addition, there are still issues and residual uncertainty around the compliance division and a lacklustre FY13 performance in assurance. Despite this, the broker is wary of staying negative for too long on a company that still has fundamentally attractive attributes. The likely benefit from a weaker Australian dollar in FY14 makes up for forecast risk in other areas and Credit Suisse envisages a return to reasonable earnings growth over the next few years.
Another broker to upgrade the stock, Citi, thinks the worst has passed. FY13 should represent the bottom of the downgrade cycle. There was no downgrade to guidance for the first time in 18 months and, whilst compliance will continue to weigh on margins in FY14, the business looks to be stabilising and margins should start to improve. With 40% of group earnings not in Australian dollars the stock is seen as a major beneficiary of the weaker currency.
CIMB also thinks the stock has reached an inflection point. After a sustained period of operating underperformance, this broker has also decided it's spent enough time at the bottom. Earnings risks are now seen moving to the upside.
Why did UBS decide to stick with the Neutral rating? While the second half of the year revealed positive momentum within the information services division, more specifically the property business, and arguably a stabilisation within compliance and assurance, the broker thinks this is more than reflected in the stock's current valuation.
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