Tag Archives: Telecom/Technology

article 3 months old

Netcomm Aims For High Growth M2M

-Contracts with global players
-Critical mass achieved
-Strong earnings growth forecast
 

By Eva Brocklehurst

Netcomm Wireless ((NTC)) is positioning to be a major player in a high growth industry. The company has secured a number of potentially large contracts that should ramp up from FY15 and provide increasing scale benefits.

Moelis initiates coverage on Netcomm with a Buy rating and 95c target, with a view that the stock offers an attractive risk/reward proposition. The company is increasingly involved in the exchange of information between machines - or M2M in tech parlance - which uses no human interface. M2M uses a cellular network, which has risen to prominence as the cost of implementation has decreased, allowing businesses to increase productivity. End-use machines run the gamut from EFTPOS, ATMs, digital signage and medical devices to elevators. The company has a major deal with Vodafone Global Enterprises, supplying M2M IP modems for international deployment. In April, Netcomm also signed a strategic partnership with Japan's Kanematsu Communications for the distribution of M2M devices.

So, which businesses deploy M2M? They include utilities, healthcare, transportation, and building automation - such as security systems. The channels for supply include partnering with international telecommunication carriers, industry distributors or specific projects. Netcomm differentiates its software by being open-platform. This means it is more versatile compared to rival products and this was a primary reason for the success with Vodafone in a competitive tender process. A typical 9-12 months development time is required to customise products. Contract manufacturers in Asia are used to ensure scalable production and limited capex requirements.

The company is in discussions with a number of new M2M and smart metering prospects in Australia, the US and the Middle East. Importantly, in Moelis' view, Netcomm has reached a level of critical mass where the fixed cost base is capable of supporting revenue approximately three times the FY14 base, delivering meaningful operational leverage.

The company has guided to revenue and earnings of $58-63m and $4.6-5.1m respectively for FY14. M2M is expected to represent 55% of revenue in FY14 compared with 20% in FY13. The balance is from the legacy business that supplies a range of wireless telecommunications products. Moelis assumes no dividend is paid over the forecast period, given the likely retention of capital for growth. The broker estimates earnings growth of 366% in FY15 and 143% in FY16, and share price appreciation as this is delivered.

Moelis is attracted to the 30 years experience the company has in the supply of communications technology and the level of revenue stability provided by the legacy business. There is strong potential for the broker's assumptions to be conservative beyond this year, supported by ongoing contract success. The company undertakes some hedging, but the broker observes a natural hedge exists as the majority of M2M revenue is in US dollars, and manufacturing costs are also in US dollars.

So what are the risks? Funding is still required. There is the potential for extra working capital to be needed for any large contracts that are secured. The company manages this need via a range of facilities. There is also a risk of loss of existing contracts, but Moelis considers this unlikely as the majority of M2M contracts ramp up after a prolonged period of testing. The key risk in this instance is timing, as the ramp-up is dependent on extensive customer testing of the product.

NetComm Wireless was founded in 1982 and recently has been balancing the existing business with a strategy of transitioning to high growth global M2M. Legacy products include consumer grade ADSL/filters and 3G routers. In addition, the company provides continuity devices to ensure businesses stay online with wireless broadband in the event fixed line connections fail. A reason for the company's success is its ability to differentiate its product offering, engineering it to meet a customer's requirements. M2M revenue growth is driven by contracts including those with Victorian Smart Metering for SP AusNet ((SPN)), the NBN for Ericsson and the Vodafone ((HTA)) orders.
 

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article 3 months old

Amcom Showcases The Cloud

-Contract value strategic in short term
-Robust results, outlook expected
 

By Eva Brocklehurst

A contract with Melbourne University has put Amcom Telecommunications ((AMM)) in an enviable position going forward. The company will install its Amcom Cloud Collaboration (ACC) technology across the university's 13,000 users. This is the first major contract since the ACC was launched in 2013 and the first deployment in the higher education sector since the AARNet customer base was established, which gave Amcom access to 38 universities as well as the Commonwealth Scientific and Industrial Research Organisation (CSIRO).

Citi envisages the contract as being more strategic than financial in the short term. The size and sophistication of Melbourne University independently validates the offering and the company will now be able to use the university as a flagship example of what it can do. The contract also gives Amcom considerable visibility within the university which can only be beneficial for future sales. Financial benefits may be further off, as there is likely to be a mobilisation period where costs will be significant and the profit impact in FY15 is likely to be modest, in Citi's view.

This contract, along with 14 other deployments of ACC, should support a strong FY15 in CIMB's opinion. The broker has decided the time is right to upgrade the stock to Add from Hold, given the recent pull back in the shares after a $40m equity raising. CIMB suspects costs related to the setting up of ACC have inhibited FY14 results, although the result should be robust. The broker expects profit growth of 12.4% in FY14 and even better in FY15. This growth is likely to be driven by fibre connections, with ACC revenue building from a low base. CIMB observes Amcom is one of the more reliable earners in the small cap telco sector as a carrier with its own fibre assets and one that is relatively immune to policy and regulatory fluctuations. Amcom raised $40m in new equity in June and CIMB expects the company to detail expenditure plans at the results. The broker believes the right acquisition will add significant operating leverage to the company's platform.

Macquarie chose to move back to a Neutral rating from Outperform earlier this month, believing the upside was well reflected in the share price. The broker noted that the placement will be used to fund a number of bolt-on acquisitions, which should boost FY15 income. Macquarie expects growth of 16% in FY14 net profit, driven by the core fibre business. The broker is concerned that the push into Western Australia is being hindered by the softer resources sector. Credit Suisse also eased back to an Underperform rating from Neutral a month ago, coming to the conclusion that sales of Cisco HCS and cloud products have been slower than earlier projections. The broker thinks this bodes for a much slower take up of Cisco product in the years ahead.

Brokers will review forecasts and targets following the FY14 results on August 13. On FNArena's database Amcom has one Sell, one Hold and two Buy ratings. The consensus target is $2.13, suggesting 5.7% upside to the last share price.
 

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article 3 months old

Telstra Poised For Upside


Bottom Line 23/07/14

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $5.16 / $4.96 - $4.92
Resistance Levels: $5.70

Technical Discussion

Telstra ((TLS)) is Australia's most prominent telecommunications company with brand recognition across all segments of the industry. 1H results showed continued momentum in mobile and fixed broadband revenue. The company also remains the best positioned telco for the upcoming NBN review process. Effective January 21st 2014 it acquired O2 Networks, a developer of data networking and network security software. In May 2014 the Company completed the sale of its Hong Kong based mobiles business CSL to HKT Limited.  The dividend yield is currently 5.2%.

Reasons to retain a bullish stance:
→ Telstra continues to gain market share across mobile and fixed broadband as voice revenue declines.
→ Completion of the CSL sale which will free up $4b in cash that can be deployed for various projects, including acquisitions and a possible Buy-Back.
→ Australian interest rates to remain lower for longer meaning demand for higher yielding stocks will be maintained.
→ Technically, the recent broad consolidation has the potential to be a foundation for a continuation of the longer term trend higher.

Despite being overbought on the daily, weekly and monthly time frames TLS continues to defy gravity as it pushes onwards and upwards.  Ideally we wanted to see a few days of weakness before price pushed higher though not to be.  Buyers have been eager to jump aboard during any retracements which as can be seen ranges between 7.1 % - 4.5%.  Diagonal resistance has now been overcome, albeit by a small margin which keeps the door open for further advances.  However, price is still sitting within a solid multi-year zone of resistance with the upper boundary sitting at $5.70.  This means there are still headwinds to overcome though this doesn’t detract from the fact that the trend since late 2010 has been exceptionally strong.  There are no indications at this juncture that a deeper retracement is going to unfold any time soon.  As long as the dividend yield remains attractive any dips should be well supported.  Indeed, whilst we remain in a low interest rate environment investors are going to continue to view Telstra in a positive light.  The only slight negative is bearish divergence evident on the monthly chart (not shown).  However, it’s by no means a textbook example with our indicator sitting in the oversold position since late 2011.  This just reiterates why we don’t use momentum indicators for buy/sell signals.  Without divergence stocks can remain both overbought and oversold for prolonged periods of time which of course is exactly the situation here.

Trading Strategy

The short-term dip down to the 200 day moving average failed to eventuate meaning we are still sitting on the sidelines here.  Not ideal, but with price recently pushing up through diagonal resistance another opportunity could present itself.  Momentum traders could even jump on right here and now with the alternative being to wait for a retest of old resistance/new support which is a common occurrence.  The caveat of course is that the retest doesn’t eventuate with price heading off without us.  One solution is to buy partial positions here and look to top up later down the track.


Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Could Telstra Instigate A Buy-Back?

-Acquisitions slow to materialise
-Cash flow to exceed dividends
-Debt payment vs buy-back
 

By Eva Brocklehurst

What is on the cards for Telstra ((TLS))? A buy-back perhaps? Credit Suisse thinks so. The broker suspects the company will announce a buy-back at the results release on August 14. Previously, Credit Suisse had not forecast major capital management until NBN migration payments ramp up from FY16, but the cost of debt has now fallen and this makes a buy-back more accretive. Moreover, Credit Suisse thinks it is taking longer than the company expected to source acquisitions in Asia.

Citi resumes coverage on Telstra with a Neutral rating and $5.30 target after a restricted period. The broker has reservations about the medium term outlook but thinks, near term, the company has all the levers for earnings growth. Citi also recognises the significance of the cash available after the disposal of Sensis and CSL Mobile. This presents a unique problem for Telstra but Citi is inclined to believe upside is factored into the share price. Hence a Neutral rating.

Telstra had $13.9bn in net debt at the end of 2013 and Credit Suisse calculates net debt of $12.7bn, after taking into account assets sales as well as the $1.3bn in spectrum payments due at the end of 2014 for the 700MHz digital dividend spectrum. This means debt is below the company's target range and there is scope for a buy-back. Moreover, the cost of borrowing has fallen sharply in the last 2-3 months from a tightening of credit spreads and the company should be able to source new medium-term funding at around 4.0%.

Citi forecasts the company sitting on gross cash of $7bn in FY15 and generating around $2bn in excess cash flow over and above dividend payments in the next three years. Citi discounts a material increase to the dividend over the next few years, given the limited franking credits available, but also thinks share buy-backs offer only modest returns because of current valuations. The broker favours acquisitions and/or the retirement of debt but acknowledges these provide debatable value accretion for shareholders.

Telstra continues to gain market share across mobile and fixed broadband as voice revenue declines and Citi thinks there is scope for compound annual growth rates of over 9% for earnings across the next three years. Credit Suisse is less convinced and thinks earnings per share accretion from a buy-back would help offset lower earnings growth emanating from a more competitive mobile pricing environment. Credit Suisse expects a $2bn buy-back, large enough to be meaningful but still leaving capacity for acquisitions. The broker has trimmed mobile forecasts and expects revenue from this segment to be flat in FY15. The more competitive mobile environment increases the operating risk for Telstra but the yield, dividend increase and potential buy-back should all provide support, in Credit Suisse's view. 

Telstra's initial reaction to changes to mobile pricing from Optus ((SGT)) was to reduce handset prices and raise subsidies but this was only meant to be a short-term offer, expiring June 30. The offer has now been extended and Credit Suisse calculates that handset price changes are equivalent to a price reduction of 11-12% on key plans, and the longer the offer is extended the bigger the impact on mobile revenue and earnings. Citi observes Telstra has always encountered stiff competition in mobile from Optus and Vodafone ((HTA)) but has still managed to take market share for the past four years. Admittedly, both competitors are advertising the improved quality of their mobile networks as they ramp up attempts to stem market share losses.

Citi points out it is worth remembering that consumers migrated to Telstra for network quality, not price. Hence, the broker thinks a price-led strategy from the competition is unlikely to be effective. On this basis, Citi expects Telstra to retain market share in mobile for the next two to three years. UBS has also observed mobile and NBN are the key value drivers for Telstra but thinks the easy wins are fast disappearing. The market is valuing mobile too highly for the broker's liking.

UBS has the lone Sell rating on the FNArena database. There are two Buy ratings and five Hold. The consensus price target is $5.22, suggesting 3.9% downside to the last share price. Targets range from $4.35 (UBS) to $6.00 (BA-Merrill Lynch). The dividend yield is 5.4% an 5.6% on FY14 and FY15 forecasts respectively.

See also Telstra Asserts Its Strength In Mobile on May 27 2014.
 

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article 3 months old

Weekly Broker Wrap: Oz Utilities, Insurers, High Yielders, Techs And CBA

-Carbon tax repeal impacts on AGL, ORG
-Insurer margins likely stable for now
-Morgans' pick of high yielders
-Credit Suisse's top fund managers
-Key tech/telco picks for Bell Potter
-More modest wealth growth for CBA?
 

By Eva Brocklehurst

BA-Merrill Lynch thinks the market may have misunderstood the full impact of the repeal of the carbon tax. An 8-10% decline in power bills and loss of transitional assistance for AGL Energy's ((AGK)) Loy Yang A power station may be the case but attention should also be given to AGL's wind contracts and Origin Energy's ((ORG)) Darling Downs power station. Without the carbon tax both these assets will suffer a $30-35m earnings hit on an annualised basis. The declines in revenue from both these assets outweigh the decline in expenditure, in the broker's analysis.

For AGL, the repeal of the tax is unhelpful on two fronts. AGL is entitled to around $250m per year in transitional assistance to offset Loy Yang A's above-market average emissions intensity. The subsidy provides around $100m/year of earnings benefit to the merchant segment which would disappear without the carbon tax. The broker factors this into the earnings decline for the company's wholesale electricity division and as the wind portfolio revenue will be affected by the repeal, Merrills now forecasts a further downgrade by 2.6% to FY15 profits to capture this impact. Origin's Darling Downs will soon operate a peak power station but all else remaining constant, it becomes a net loser with the cessation of the carbon tax. AGL's Southern Hydro and Origin's Mortlake will also be affected but Merrills assumes the impact here is immaterial on a net basis.

***

Growth in insurers' Gross Written Premium (GWP) is slowing. Credit Suisse expects minimal increases across personal and commercial lines. This does not mean margins will necessarily deteriorate, as the reduction of input costs along with lower reinsurance rates should allow margins to be maintained for now. A favourable reinsurance environment should also allow insurers to buy additional cover and protect earnings. This ultimately reduces downside dividend risk for Insurance Australia Group ((IAG)) and Suncorp ((SUN)) in the broker's view.

Suncorp may offer a market-leading dividend yield but QBE Insurance ((QBE)) remains Credit Suisse's preferred pick. QBE is trading at a significant discount and while macro factors are working against the insurer, there is significant upside on delivery of an improved earnings base. The broker envisages more downside risk to local commercial line premiums than personal lines, which increases the downside for IAG. As a result of the acquisition of the Wesfarmers ((WES)) underwriting business, IAG's exposure to commercial lines has increased to 27% of GWP versus 20%. Moreover, IAG has withdrawn from the Queensland CTP - green slip - market and Suncorp has jointed the ACT green slip market, creating a GWP drag for IAG and an opportunity for Suncorp.

***

Morgans continues to favour higher yielding equities while the cash rate remains flat. Some stocks the broker has screened for attractive growth and yield characteristics include AGL Energy, Henderson Group ((HGG)), Orora ((ORA)), Perpetual ((PPT)) and Primary Health Care ((PRY)). The broker considers these stocks should generate a 10% shareholder return in FY15 and earnings growth of at least 10%, and they have total debt/earnings ratio of less than two times with above-market earnings growth forecast for FY15 and FY16.

***

Credit Suisse has reviewed Australian fund managers and favours stocks that offer reasonable value but strong earnings growth. The top three are Henderson, Perpetual and BT Investment Management ((BTT)). Henderson's current valuation looks conservative, given the growth trajectory of funds under management, in the broker's view. Perpetual, meanwhile, offers the highest earnings growth for the sector over the next two years. Credit Suisse suggests it inexpensive as it is trading below the historical price/earnings premium. BT Investment is trading at a 3.0% discount to Australian fund managers and Credit Suisse thinks the recently-acquired JO Hambro business should continue to attract positive net inflows with further upside potential if the expansion into the US and Asia is successful.

***

Bell Potter anticipates Altium ((ALU)), Empired ((EPD)) and Mobile Embrace ((MBE)) will be key performers in the technology/telco sector in the upcoming reporting season. The drivers for Altium and Empired are strong results and a positive outlook, while the broker looks for Mobile Embrace to meet or exceed guidance. Good results are expected from My Net Fone ((MNF)), PS&C ((PSZ)) and Vocus Communications ((VOC)), with all three having some re-rating potential. The greatest re-rating potential is for PS&C, in the broker's opinion, given the other two have incurred some re-rating in the lead up to the results already.

***

The implications from Commonwealth Bank's ((CBA)) review of open advice from its financial planning divisions is likely to be modest, in Morgan Stanley's opinion. The bank has not quantified the potential cost of compensation but media reports suggest it could reach $250m, of which $52m has already been paid. This equates to just 0.1% of the bank's market capitalisation or five basis points of CET1 capital. The broker assumes any compensation and costs will be included in cash profit and has added $100m to expense forecasts for each of FY15, FY16 and FY17. This reduces cash earnings per share by 1% in those years. There is some risk that the damage to the bank's reputation leads to more modest growth in wealth management but as this divisions accounts for just 9.0% of operating earnings the broker does not expect a material impact on banking revenue.
 

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article 3 months old

More Upside For Hills Industries

-Several recent acquisitions
-Yet balance sheet not stretched
-Funds deployed to higher growth areas
-Yet capital management potential
 

By Eva Brocklehurst

A spate of downgrades to guidance for FY14 and a subdued economic environment meant there was nothing particularly surprising for brokers when Hills Holdings ((HIL)) confirmed a soft outlook. Nevertheless, CIMB called it almost an upgrade, in that the company is one of the few that has stuck to original guidance, albeit now at the lower end of the range. Hills expects FY14 profit to still be in the range of $26-28m, just at the lower end.

Hills plans to become an integrated provider of solutions in telecommunications, technology and health care and recently acquired Audio Products, a supplier of professional audio products in Australia and New Zealand, which is forecast to turn over $26m in FY14. This is the latest in a number of bolt-on acquisitions the company has completed in the second half, including the Auckland-based Intek Security, Questek and Open Platform Systems. The fact the company retains its initial guidance range points to increased stability after significant divestments were made in the last 18 months, in CIMB's view.

The broker considers there is upside risk to such subdued expectations, as Hills retains significant balance sheet capacity. Should this be deployed at historical multiples, there is 20% implied upside for earnings going forward. The economic climate may be subdued, and organic sales growth limited in the short term, but CIMB thinks there is enough in savings flowing through and the stock remains compelling value. Hence, the broker retains an Add rating and $2.10 target.

Despite the share price increase over the past year, amounting to around 80%, Moelis thinks the price/earnings ratio for FY15 estimates of 13 times is undemanding, in view of the operational leverage and ongoing capital management opportunities. The acquisition of Audio Products, combined with the company's existing businesses, will create a leading player in electronics and communications and is indicative of the ongoing re-deployment of capital into higher growth areas. Management has signalled the softer FY14 guidance includes the partial contribution of discontinued businesses including Orrcon and Fielders, with the primary growth driver being further cost cutting benefits.

Moelis anticipates a small net cash position in FY14, after the $80m in net proceeds emanating from the sale of the two steel businesses to BlueScope ((BSL)) back in February, as well as an unused debt facility of $200m. This supports ongoing capital management, including the buy back of shares and sustainable 5% yield. Moelis retains a Buy rating and $2.15 target.

Citi observes, following the acquisition of Audio Products, that the company could spend a further $100m on acquisitions and net debt would only approach 20%. Citi estimates that assuming all $100m was spent on acquisitions at a multiple of four times earnings, this could generate an incremental $35m, representing over 50% of the broker's FY14 earnings forecasts. Such potential upside intrigues Citi. The broker rates Hills as a Buy with a $2.35 target because the divestment of the steel assets is approaching conclusion, which should finalise a re-rating of the business. Moreover, restructuring and transformation should drive further changes, with the positives including a focus on value-adding services as opposed to the prior focus on products.
 

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article 3 months old

Buy Telstra For the Dividend

By Michael Gable 

The 2014 financial year is over and the ASX 200 managed to finish 12.4% higher. We are looking forward to another year of low interest rates with consensus estimates picking the market to return 11.5%. The money has been made in the safer high-yielding stocks, and we now need to look beyond this to gain an advantage. Combined with some careful covered call writing for stocks taking a breather, we should have another good year despite an eventual “correction that we have to have”, which may occur at some point. For those treading carefully in the market here, we have identified a couple of opportunities, including in the defensive stock Telstra.
 

Telstra Corporation ((TLS))


TLS has now traded to the bottom of its recent channel and appears to be turning back up again. We may be expecting to see some buying come into TLS here as investors search for another dividend. Because of the 45 day holding rule for franking credits, we looked at the performance of TLS in the 45 days before ex date since the beginning of 2012 and it has risen on average 16c. The average drop on the ex date has been 13c. So with a likely ex div date of 18 August (unconfirmed), and the 45 days prior to that occurring this week, TLS at the bottom of the channel here may be finding support for a run up into the ex dividend date.
 

Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

UXC Signals Improvement Ahead

-Upside potential to share price
-Acquisitions to contribute strongly
-Ability to capitalise on opportunity
 

By Eva Brocklehurst

IT services provider UXC ((UXC)) has cautiously signalled a recovery in earnings is underway. An improvement in second half earnings has been assisted by contributions from recent acquisitions and as improvement was also weighted to the end of the half, this increases broker confidence that FY15 will reveal better growth.

The company is guiding to underlying earnings of $35.2-37.0m in FY14, a slight improvement on FY13. The company has erred on the side of caution, trimming operating margin targets across the three main divisions. The targets the company has set remain realistic, in Moelis' view, despite a subdued environment. Fundamentals are undemanding, given the 25% share price decline in 2014 as well as UXC's quality and unique industry position in applications. This underpins Moelis' assertion that the weakness in the first half was, in large part, attributable to project over-runs. Cost over-runs in the second half have been minimal and Moelis believes this is an important positive indicator from a risk management perspective.

JP Morgan is not overly concerned, despite implied second half earnings being behind its expectations. The broker believes its earnings forecasts are on the conservative side and a reduced valuation suggests meaningful upside exists to the current share price. The broker is comfortable with the growth outlook and retains an Overweight rating. Recently-won contracts and acquisitions should generate close to $100m in revenue in FY15 on an annualised basis. The broker lowers its target to $1.02 from $1.20 in line with a lower discounted cash flow valuation, which is partly offset by rolling forward the target date. JP Morgan considers the lessons learned in the delivery of key projects should assist in margin performance on larger contracts in the months ahead.

Management has confirmed the Keystone acquisition made in late 2013 is now fully integrated. Keystone, Australia's largest re-seller and service provider for ServiceNow, is achieving its targeted run rate and should contribute $90-100m in revenue in FY15. Two smaller acquisitions were completed in June 2014 and will be fully integrated in the Oracle and SAP segments, with $7-10m in revenue expected to be generated in FY15. Moelis believes, despite limited organic revenue growth for contracting and infrastructure, the increase in activity for applications and an ongoing focus on lifting margins should stand the company in good stead. The broker retains a $1.00 target and Buy rating.

UXC has a strong relationship with application vendors such as Oracle, SAP and Microsoft Dynamics. It also has balance sheet capacity and a reputation for delivering on large contracts. JP Morgan considers these strengths should allow it to capitalise on opportunities for growth in North America, on the back of Microsoft applications, in cloud-based applications aligned to ServiceNow, and via cross selling. On JP Morgan's estimates the company offers a 4.7% dividend yield on FY14 forecasts, rising to 7.3% in FY15 and 8.1% in FY16. Moelis' estimates suggest 5.4%, 6.9% and 8.0% respectively.
 

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article 3 months old

Reckon Takes Control

-Buy-back accretion in 2014, 2015
-Competition more aggressive
-More feedback needed on cloud
 

By Eva Brocklehurst

Accounting software company Reckon ((RKN)) is taking control of itself. The company has signed a selective buy-back agreement to purchase Intuit's 11.45% stake, at a price of $1.85 a share for total consideration of $27.4m. Reckon will fund the share buy-back from debt facilities. The buy-back is conditional upon approval by special resolution of shareholders not associated with Intuit.

Deutsche Bank views the deal as a positive, representing effective use of the balance sheet to generate earnings accretion while maintaining conservative gearing. It removes a potential stock overhang and severs ties to Intuit, which is now directly competing with Reckon. Assuming the transaction occurs in the second half the broker estimates the buy-back to be 3% and 6% accretive to 2014 and 2015 respectively. Outside of this transaction, Deutsche Bank envisages Reckon still retains risks in the execution of its move to a subscription-based model. Hence, the stock is unlikely to outperform in the next 12 months, in the broker's opinion. Deutsche Bank retains a Hold rating.

Morgan Stanley is quite positive on the idea of buying back stock from a competitor, both in terms of the earnings uplift and the removal of uncertainty. Still, the development is only an incremental positive. The issue of holding its market share in a competitive environment which is becoming more aggressive remains a concern. Morgan Stanley retains an Equal Weight rating. Still, it does remove the uncertainty of having a competitor on the register and comes on the back of guidance at the May AGM that signalled trading in the year to date is consistent with consensus expectations.

The bigger debate, Morgan Stanley agrees, is around the ability to shift to a cloud-based model when the competitive environment has also shifted focus to well-funded international players, from the cosy duopoly of the past. Morgan Stanley would like to witness Reckon deliver more on its promise of an improved platform and functionality, amid any feedback that suggests the product is indeed gaining traction.

The delayed launch of Reckon One has meant Goldman Sachs has lowered sales forecasts and increased cost assumptions for marketing and infrastructure expenses. The broker has, as a result, cut FY14-16 earnings forecasts by 5-6%. While awaiting formal shareholder approval of the buy-back before updating further, Goldman estimates the buy-back should be 8% accretive on an annualised basis and includes this in a price target of $2.25, retaining a Neutral rating. The buy-back is a logical initiative, in the broker's opinion, given the expiry of the licence agreement for the distribution of Intuit products in Australia and New Zealand. Reckon will benefit to the amount of an annualised $5.2m in earnings from the cessation of royalty payments to Intuit from February 2014 and Goldman assumes the net benefit in 2014 is $3.5m, given the delays to Reckon One.

Reckon attracts three Hold ratings on the FNArena database. The consensus price target is $2.18, suggesting 1.6% upside to the last share price. The dividend yield on FY14 and FY15 earnings expectations is 4.5% and 5.0% respectively.
 

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Weekly Broker Wrap: Broadband, IT, Retail, Mining, Electricity And Building Products

-Value in small players in broadband
-More downside risk likely in IT
-Two-year budget drag on retail spending?
-Warnings on mining services stocks
-NSW power play heats up
-Will ACCC clear Boral/CSR brick JV?
-Aluminium positive for CSR
 

By Eva Brocklehurst

Broadband penetration is reaching maturity in Australia and changes to market share are becoming key to value creation. Morgan Stanley believes prices are the reason why consumers change providers and, having reviewed broadband prices for June, thinks this supports Overweight calls on TPG Telecom ((TPM)) and iiNet ((IIN)). Looking at broadband plans, TPG has the best value product in Morgan Stanley's opinion. Delivering slightly more expensive plans but better customer service is iiNet's strategy. Telstra ((TLS)) offers the least value in its plans compared with peers, but continues to gain broadband share from success in bundling, underpinned by the company's broader market reach. NBN pricing plans are in their infancy but Morgan Stanley believes they support the view that iiNet and TPG will win share as the NBN is rolled out, particularly in regional areas.

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Trading updates across the IT services sector have indicated downside risk to earnings. Morgans was hoping for a flat second half in FY14 with recovery in FY15 but suspects disappointment is in the wings. Data #3 ((DTL)), SMS Management & Technology ((SMX)) and PS&C ((PSZ)) have all downgraded expectations and the broker thinks Oakton ((OKN)) and UXC ((UXC)) are at risk of similar downgrades. Having said this, Morgans is convinced overall IT spending is not discretionary and businesses will be forced to upgrade hardware, systems and processes to improve productivity. Still, the delays and deferrals keep happening and, meanwhile, the broker waits.

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On another subdued note, Citi thinks the impact from the latest federal budget cuts will hit consumers' wallets in FY15 and FY16. While the immediate rush of negative sentiment may fade quickly, the drag on retail spending might continue for two years. The broker expects a 2% drag on spending in FY15. Retailers will need to rely on wages growth or lower savings and higher house prices to boost sales.

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Still more gloom appears. Naos believes it is time to be careful with mining services. Downgrades are still catching unwary investors trying to pick a bottom to the earnings cycle, hoping that current prices are providing long-term value entry levels. The asset manager finds evidence for this in Ausdrill's ((ASL)) recent downgrade. To make the right choices in the sector investors need to focus on the client base of the service provider, the miner. More specifically, the focus should be on that miner's commodity exposure, strength of its mines and nature of expenditure.

Listed investment company NAOS ((NCC)) offers the following warnings: avoid capex related business models, as they may look cheaper but the cliff in capex spending is approaching, and avoid exploration-related models, with commodity prices weak and falling. The focus needs to be on models that target maintenance, repair and replacement. NAOS believes this sort of spending is about as non-discretionary as you can get in mining services. Moreover, a preference should be shown for those servicing the major miners with the best assets and most robust operating margins.

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The potential privatisation of the NSW electricity wires and poles has been given a further push, with the government announcing plans to lease 49% of the electricity networks. The NSW government ultimately plans to sell stakes in state-owned network services such as Ausgrid, Transgrid and Endeavour, excluding rural network Essential. How this ends up being priced with be key to how enthusiastic investors become, in JP Morgan's opinion. The listed providers such as DUET ((DUE)), Spark Infrastructure ((SKI)) and SP AusNet ((SPN)), and to a lesser extent APA ((APA)), are expected to vie for the assets. The broker is not getting too excited just yet. The government will only undertake the sale of the poles and wires with an election mandate and, because privatisations have been unpopular in the past, the timing and final structure is difficult to predict.

The government has also flagged the money will be spent on infrastructure for roads, rail, schools, hospitals and water. UBS thinks this is good news for the construction materials sector. The broker expects electricity prices will fall in NSW by 5% in FY15 and regulated prices will grow at around the rate of inflation. Nevertheless, UBS notes the traditional utility model remains under long-term structural threat from solar and storage and this should be priced in to expectations.

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 CIMB has found a number of parallels between the proposed brick JV between Boral ((BLD)) and CSR ((CSR)) and the merger proposition between Boral and Adelaide Brighton ((ABC)) that was blocked by the competition regulator in 2004. This suggests that the current JV transaction may encounter regulatory headwinds. This has negative implications for the two businesses. Profitability is expected to remain under pressure in the absence of the JV being approved, as excess capacity remains in the system and competition is robust. The case is similar to the 2004 situation in terms of competitive threats.

CIMB expects the Australian Competition and Consumer Commission's definition of the market for clay bricks will rule at the end of the day. The companies will likely argue for a broader market definition but a narrower one is quite appropriate, in the broker's view. On this basis the JV would produce two players with a peak share of around 60% of a product that has a 65% share in wall finish. CIMB expects the ACCC's refusal to accept this proposition will prompt a fall-out. As neither party can deliver an acceptable return in bricks, it may force an exit by one of them. This would mostly likely be Boral, in CIMB's opinion.

Strengthening aluminium premiums are a positive development for companies such as CSR which have smelters. They can capture all additional upside at the earnings level. The strengthening premium remains a negative for end users of aluminium, such as Capral ((CAA)), which is unable to pass through the premium increases to customers. With scope for premiums to rise further by the end of the year, this signals to Bell Potter there is upside earnings risk for CSR and downside risk for Capral.
 

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