Australia | Feb 13 2014
-Digital hurdle to overcome
-Acquisition opportunities
-Customer expansion potential
By Eva Brocklehurst
Brokers have largely taken up neutral ground on Recall ((REC)), which has scored a few more coverage initiations after listing on ASX in December. Recall was the information management and document storage arm of Brambles ((BXB)). New recommendations have concurred with a view that, while the company has a strong recurring revenue theme, growth will be modest.
Citi is the latest broker on FNArena's database to initiate coverage of the stock, ascribing a Neutral rating and $4.55 price target. Citi envisages growth opportunities exist, but these are factored into the share price ahead of delivery. Growth is expected to be on the back of acquisitions but also new customers, the success of which will be measured in terms of returns. On the expansion side, Citi suspects the majority of growth will come from existing clients that commit storage to Recall in order to justify a new facility and networks.
The broker is not convinced that the company will be able to replace, or indeed improve on, physical document storage growth with the digital variety. In fact, Recall may be the number two globally in physical records management but is one of many providers in the digital marketplace. The broker considers this to be one of the larger risk profiles for the company and management must provide sufficient assurance they can overcome the risks. Therefore, despite a defensive growth profile and strong free cash flow, Citi finds value is better elsewhere in the sector.
Goldman Sachs has also commenced coverage with a Neutral rating and $4.74 price target. This broker also highlights the risk with digitising document storage. Paper prices have also created volatility in earnings and Recall sells a substantial quantity of recycled paper. A higher paper price helps recycled paper sales while the converse is also true.
Goldman notes the company operates in a highly fragmented, low growth mature market with higher growth rates coming from emerging markets. The broker expects opportunities for acquisitions will not go uncontested, given the company's main competitor, Iron Mountain, and other private firms are pursuing similar strategies. The company has also estimated 65% of the potential storage market is yet to be tapped. These are potential customers yet to outsource their document storage, something Goldman thinks provides more of an opportunity, as increased regulatory and compliance standards create a value proposition for the handing over of information management.
In January, UBS kicked off with a Buy rating and $4.80 price target. The broker expects Recall to grow earnings by 7% per annum. UBS notes the stock is unique in that it derives two thirds of revenue from outside North America and this gives it the edge when it comes to growth. UBS observes a material slowdown in revenue growth since 2009, with the five years to 2008 generating 8% per annum against only 2% since. This is construed as a case of cyclical realities, driven by lower transaction revenue. Carton storage volumes have growth by 5% over the same period. UBS thinks the high conversion cost of existing cartons will slow the digital incursion and contain the impact to new volumes. The Buy rating is based on the high quality of the business and the high level of recurring revenues. In this respect UBS echoes the views of the other similar rating on the database, CIMB.
CIMB regards Recall as offering exposure to a stable earnings stream, decent returns and reasonable dividend yield (2.2% on FY14 and 4.0% on FY15 consensus earnings on the database). The long term structural challenges exist from digitisation, but low growth expectations provide the buying opportunity for the stock in the immediate aftermath of the de-merger. The broker also considers the uncertainty over the course of digital storage take-up creates an initial opportunity to buy the stock. CIMB commenced coverage with an Add rating and $4.88 price target and believes earnings upside exists in the form of potential acquisitions, increased conversion of the potential market and a higher paper price.
On the FNArena database the stock has two Buy (or equivalent) ratings, four Hold and one Sell. JP Morgan, which initiated coverage with an Underweight rating under the broker's sector-relative rating model , is the lone occupant of the latter bloc, not wanting to value the stock aggressively. Price targets range from JP Morgan's $4.07 to $4.88 (CIMB). The consensus target is $4.53, signalling 1.2% upside to the last share price.
See also No Shortage In Challenges For Spun-off Recall on December 16 2013 .
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