PS&C Building Opportunities In Technology

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-Focus on revenue diversity
-Impressive client base
-Key is vendor payment options
 

By Eva Brocklehurst

There's nothing in the initials of PS&C ((PSZ)) that would, at a glance, excite investors, but the implications of the company's name have captured the attention of brokers. PS&C listed on ASX last month. The moniker stands for People, Security and Communications and reveals a diversified information and communications technology (ICT) company.

There is the promise, in Morgans' (ie formerly RBS Morgans) view, of healthy organic growth as the business benefits from substantial intra-company client relationships. Hence the broker has initiated coverage with an Add recommendation and $1.24 price target. Morgans also expects that this target's 10% discount to valuation will dissipate with time. Bell Potter has also initiated coverage and taken a Buy rating with a blended $1.25 price target, a 34% premium to a share price around 94c. The total return, including dividend yield, is expected around 36%.

So, what is PS&C exactly? The company has created three key segments through the acquisition of five profitable enterprises, which Bells notes have been in operation for seven to eighteen years. Morgans hails management's strategy of collecting businesses that provide greater value to the whole than they have as individual entities. Both brokers like the revenue diversity and Bells notes no single customer contributes more than 12.5% of group revenue. Rather than achieving growth through cost synergies as a result of mergers and acquisitions, the brokers like the fact that this company aims for revenue synergies – bringing associated businesses together into one company and acquiring a wider client base.

The people part is consulting, contractor management and recruitment. PS&C provides contractor management so non-IT companies do not have to have full-time employees. PS&C makes a margin by managing the payroll for these employees. Blue chip clients include Toyota, Amcor ((AMC)) and Telstra ((TLS)). The brokers observe this is the area of the business where PS&C faces the most competition. Hence, there's a need for differentiation and Bells believes this a is a reason why the company is broadening its capabilities, as well as providing contractor management. It is also why PS&C focuses on the high-end services, such as providing resources to critical infrastructure.

The Security aspect includes Securus Global and HackLabs, operating in Brisbane, Sydney and Melbourne, which Morgans describes as "ethical" hacking companies. At the client's request, they test systems for security flaws and faults and produce reports so these can be rectified. Bells thinks the plus factor is that, in this very fragmented market, PS&C owns these two key companies. Hence, there's good exposure to a growing area of need. This segment is where the broker forecasts double digit revenue growth in FY14, FY15 and FY16, with a relatively stable gross margin around 59%.

Lastly, communications – internet, telephony and networks, with installation of systems the main driver of revenue in this segment. This segment only operates in and around Sydney but the annual spending on communications infrastructure in NSW is estimated to be around $1.4bn, according to Bells, enhanced by the NBN roll-out.

PS&C raised IPO funds largely to pay for the acquisitions. There are also earn-out components for the vendors over three periods but, importantly from the brokers' perspectives, it's PS&C that decides how the payments will be formed – whether in scrip, cash or a combination. Morgans considers this deal a positive for shareholders as it allows the board to balance the interests of the vendors and shareholders. No guidance has been issued as to the breakdown of payments, but the broker bases forecasts on assumptions that earn-outs will be cash and/or debt funded, and not via scrip.

The largest risk, in Morgans' view, is that the company could lose key customers or technical staff, although the broker acknowledges this is mitigated by the earn-out options. Nevertheless, if the earn-outs become 100% scrip based then profit growth would need to exceed 15% to deliver the earnings growth. There is also limited visibility given the company's low liquidity and lack of a track record on the ASX. Bells points out that the professional service agreements do not guarantee minimum levels of work, and this is a risk. Levels of work may be at risk in the future or even cease, adversely affecting performance. The company is also very dependent on the the ICT services market in Australia and the rate of growth in this market. Other, more general, risks are associated with contracts being cancelled, cost over-runs, technological competition and disputes.

Standing the company in good stead are the panel and preferred supplier agreements for government as well as long-term partnering agreements. There are 43 panel agreements across the company in total with major ones with NSW and Telstra. The company is on the NSW government's ICT panel, being one of just three in the Advanced section to supply all 13 categories.
 

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