CSG’s Outlook Buoys Brokers

-Earnings stability increasing
-Key venture with Samsung
-Potential for re-rating
 

By Eva Brocklehurst

There was little to fault in technology provider CSG Ltd’s ((CSV)) strong first half. Organic growth initiatives have made a significant impact on earnings and brokers are excited about the scope for a much bigger business.

JP Morgan analysts believe the market is not accounting for the company’s target to sustain a 90% pay-out ratio at 9c per share. The company’s revenue is a split between transactions, mainly equipment, and annuity, which comprises service contracts and leasing. At the operating level, annuity comprises 76% of profit. The growing proportion of annuity revenue is a positive in JP Morgan’s view, as it indicates increased stability in earnings. 

The business solutions division, which sells and services long-term contracts to a range of print and non-print devices, gained new customers in Australia at a rate of 26% of equipment revenue growth in the half. New Zealand generated particularly strong revenue growth of 83%.

CSG Ltd has been selling Samsung products in a bundled offering with printer devices in Australia for the past nine months and, thus far, this has averaged around $30,000 per customer, well above the company’s expected per-customer value of $12,000. This large difference reflects the higher prices paid for items such as interactive whiteboards and large screen TVs. Non-print equipment sales are now more than 5.0% of the total and Macquarie expects this will increase as the sales team becomes more knowledgeable about new products.The Samsung venture should launch in New Zealand this month.

Macquarie is more confident now, noting clarity has improved around opportunities and future earnings. Enterprise sales now account for 10% of revenue, from minimal levels three years ago. The enterprise solutions division recently won major contracts with Victoria University, Auckland District Health and Fonterra. While this division is yet to be a meaningful contributor to group earnings, management expects the Australian potential is $420m in total contract value from FY15 onwards. Macquarie forecasts around $10m in revenue emanating from this pipeline in FY15. The broker also notes the print-as-a-service offering provides a platform to expand into managed services later this year.

The company’s third division, finance solutions, is building scale. The Australian business converts around 95% of customers to the company’s financing products. Offerings in both Australia and New Zealand will increase in FY15, with management targeting a book in excess of $220m. Brokers had some concerns over margin compression in this division in the half year, as some positive hedges have rolled off. Also, the NZ book achieves better margins compared with Australia, yet Australia has grown as a proportion. CSG Ltd is confident the division will deliver on expected margins, as more fees are added to the Australian book and banks become less stringent on capital requirements when the company’s record is more established.

Long term re-rating of the stock has just begun, in Morgan Stanley’s view. The company has cutting edge technology that can sustain strong double digit growth and margin expansion. The broker has lifted forecasts to the top of the company’s FY15 guidance range with step ups in FY16 and FY17, as the technology advantage and value proposition translates into winning more customers and improving its share of business expenditures. The broker expects the loan book to double in less than three years.

CSG Ltd intends to explore other regional markets such as Singapore and look for IT managed services opportunities in New Zealand.There are three Buy ratings for the stock on the FNArena database. The consensus target is $1.63, suggesting 15% upside to the last share price. The dividend yield is 6.3% for both FY15 and FY16 consensus forecasts.
 

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