Small Caps | Aug 19 2015
-CodeBlue acquisition supportive
-Moving to full IT service offering
-Increasingly substantial business
By Eva Brocklehurst
CSG Ltd ((CSV)) is making steady progress on its business transformation and bolstering its capabilities.The company's FY15 results were solid, with earnings up 15% to $33.5m, and earnings growth is expected to accelerate in FY16.
Key contracts with two universities and a mid-sized enterprise delivered 28% growth in enterprise solutions earnings. This division has significant opportunity for growth, in Macquarie's opinion, with a qualified pipeline of $285m in transaction value for FY16.
The company will raise $30m in equity to fund the acquisition of CodeBlue, an IT company which employs 141 staff and which offers desktop and server support through centralised operations in Auckland. Total consideration is to be paid in three tranches over two years, capped at NZ$15m. Macquarie likes the acquisition, believing it will provide the crucial IT support for a fully managed service. The broker upgrades longer-term assumptions to reflect growth opportunities from new initiatives.
Following the sale of technology solutions to NEC in 2012 the business was prevented from competing in the IT managed services sector for three years. Now this period has ended the company has revealed a strategy to re-enter the market. Near-term revenue opportunities include the leveraging of printing and new technology products across the CodeBlue customer base and offering financing solutions when CodeBlue is providing the hardware.
Business solution revenue grew 10% in FY16 and Macquarie was encouraged by sales to new customers. Finance solutions showed strong growth in receivables, aided by the $10m in lease receivables acquired from Capital Finance Australia in the second half. JP Morgan hails the new offering, which enables small to medium sized enterprises to consolidate up to 15 suppliers into one. This burgeoning one-stop shop for IT and managed services underpins the broker's confidence in an Overweight rating.
The extra funds raised should provide the company with the flexibility to pursue acquisitions. Management has identified bolt-on acquisitions which can ramp up its full managed service. Macquarie suspects those opportunities will be sought where there are strong customer bases in order to leverage CSG products or where there is extra capability to deliver technology as a service.
FY16 guidance is stronger than Morgan Stanley anticipated. The pathway to accelerated growth in FY16 has been further outlined with three five-year enterprise contract wins for a combined value of $40m. The broker welcomes a continuation of the strategy of offering more product to long-term annuity-based customers.
The defensive earnings growth profile warrants a premium to the market, in Morgan Stanley's opinion. The broker expects to witness a continued change in market perceptions of the stock, as the company adds certainty to its growth outlook and becomes increasingly substantial and therefore relevant to investors.
On the FNArena database there are three Buy ratings. The consensus target is $1.89, suggesting 15.4% upside to the last share price, and compares with $1.63 ahead of the results. The dividend yield on consensus forecasts is 5.5% for both FY16 and FY17.
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