Small Caps | Jun 10 2014
-Potential to make forecasts
-Downside limited in FY15
-Dividend confirmed
By Eva Brocklehurst
PS&C ((PSZ)) has succumbed to the weak demand gripping the Information Technology sector. Delays in the commencement of work in communications has pushed out the company's earnings timeframe so PS&C needs to complete projects rapidly to meet prospectus forecasts.
In its short life as a listed player, having commenced trading on ASX last December, the company has had to downgrade guidance for FY14 earnings, to $6.65-7.40m from the prospectus forecasts of $7.37m. The consulting part of the business is expected to exceed forecasts while the security segment, which tests to find faults in IT systems, is mixed. Hacklabs is expected to exceed forecasts while Securis is likely to be weaker. Allcom, the communications business, also has the potential to miss forecasts, but this depends on the timing of work done.
Brokers are not too worried. The company intends to pay a final dividend for FY14 of 3c, fully franked, which is above Bell Potter's expectations of 2.5c. The broker has downgraded FY14 earnings forecasts by 8% but makes little change to forecasts thereafter. Work not done in the communications business in late FY14 should flow through to FY15 and boost that period. Bell Potter retains a Buy recommendation and $1.15 target.
All going well, the company could still reach prospectus forecasts, in Morgans' opinion. The broker observes the IT services sector is generally quite weak. Morgans has reduced FY14 forecasts by around 9% and, given overall sector weakness, reduced FY15 forecasts by 7%. As PS&C is trading on a FY14 and FY15 price/earnings ratio of 7.7 times and 7.0 times respectively, yielding 7%, there is value in the stock in the broker's view.
Moreover, earnings growth is still ahead of peers and, as the share price has fallen 25% since the IPO, Morgans believes weakness is already factored in. The company's people business – consulting, contractor management and recruitment – is performing well and the broker considers the main issues seem to be in the communications business, which typically has a very strong fourth quarter.
Morgans has retained an Add rating as the stock is fundamentally cheap. The target is lowered to $1.05 from $1.24. Downside risks relate to the company potentially becoming a victim of tax loss selling, where investors sell to crystallise capital losses ahead of the June 30 end to the tax year. Despite this prospect, the broker believes the business has fundamental value, and downside risk in FY15 is limited.
See also, PS&C Building Opportunities In Technology on January 20 2014.
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