Tag Archives: Telecom/Technology

article 3 months old

Telstra: Correction Run Its Course?

 

 

Bottom Line 20/10/15

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: $5.25 - $5.23
Resistance Levels: $6.53 / $6.73

Technical Discussion

Telstra Corporation ((TLS)) is a telecommunications and information services company providing services for domestic and international customers. It is Australia's most prominent telecommunications company with brand recognition across all segments of the industry.  On 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. In July 2014, Telstra acquired an undisclosed minority stake in Telesign Corp. For the year ending the 30th of June 2015 revenues increased 3% to A$26.02B. Net income before extraordinary items decreased 6% to A$4.21B. Revenues reveal the Telstra Retail segment increase of 6% to A$17.19B.  The dividend yield is currently 5.8%.  Broker/Analyst consensus is "Hold".

Reasons to retain a bullish stance longer term:
? New investment in the mobile network should reap benefits.
? Strong first half results presented with mobiles being a big contributor.
? Earnings growth is anticipated with potential to see dividend increases as well as capital management.
? In a low interest environment TLS is an alternative to the banks.
? Australian interest rates to remain lower for longer meaning demand for higher yielding stocks will be maintained.

We noted the reluctance to bounce during our last review with a sideways consolidation taking the form of a symmetrical triangle.  It was important that lower boundary wasn't exceeded although this is exactly what transpired.  The measured move out of the pattern has now been achieved which means once again we are on the lookout for buyers.  Yesterday definitely didn't contain too many of those with a steep loss and a low close being the end result.  Today was much better although we definitely aren't going to get overly bullish on one day's price action.  Having said all this, there are some positives to take away from the chart. 

First of all, it appears that a 5-leg movement has completed from the high of wave-B – which ideally should complete the retracement.  It's also worth noting that usually wave-iv will form as a consolidation pattern with a triangle being the prime candidate; of course that's exactly what's transpired here.  If we are correct in that a larger degree A-B-C correction has terminated then the bounce zone as annotated just above $6.00 should be the next port of call.  However, it's important that yesterday's low at $5.27 isn't overcome.  It's also quite interesting that the 1.618 projection of wave-A sits at $5.25. A push beneath that level seriously rings the alarm bells.  The positive today was that bullish divergence triggered meaning it should now be providing a tailwind. As a minimum yesterday's low should remain untouched until our indicator hits overbought levels.

Trading Strategy

One problem that analysts are highlighting is that the ACCC has cut mobile and fixed line access pricing which Telstra acknowledges will hit revenues.  However, management also stated that the effect on earnings should be negligible.  We'll see.  From a trading point of view a low risk entry is standing out. Buy following a break above today's high at $5.45. Place the initial stop beneath yesterday's low at $5.24. The target sits between $6.00 - $6.17.
 

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

Uncertainty Lifts As GBST Holdings Downgrades

-Potential for strong rebound
-Lack of CEO adds uncertainty
-Question over international expansion
 

By Eva Brocklehurst

Financial services software company, GBST Holdings ((GBT)), has issued a profit warning which has also exacerbated leadership uncertainty, given the impending retirement of the CEO, Stephen Lake.

The company has downgraded FY16 earnings forecasts substantially because of project delays in Europe and New Zealand while margins will be squeezed by a ramp up in R&D costs stemming from the international expansion, although this was foreshadowed.

Despite the oppressive news, several brokers remain of the view that the company has some supportive factors which stand it in good stead. Morgans believes robust technology and strong customer relationships provide potential for a strong rebound. A minor positive, noted by Deutsche Bank, is that the Australian capital markets business is expected to report an improved first half result following two years of earnings declines.

Deutsche Bank believes the downgrade, given it is primarily driven by contract deferrals into the second half and FY17, does not mean there are structural issues or market weakness. Rather, it is more a case of the sorts of risks frequently entailed in project work.

The broker also acknowledges some of the downgrade relates to continued international investment in capital markets, which may provide a strategic opportunity for a new CEO, although that division may also be reviewed under new leadership. Deutsche Bank retains a Buy rating while reducing its target to $5.30 from $5.80.

Morgans is concerned that the increase in international capital markets exposure is poorly timed and there is uncertainty without a permanent CEO. The board has decided not to appoint an internal candidate to replace Stephen Lake and this has left the company looking vulnerable, the broker believes, as this is a business where confidence is important.

Hence, the appointment of a new CEO with a track record is essential. Morgans also highlights that the company, being virtually rudderless, could move into the sights of one of the major global players in the industry.

A well regarded new CEO and a strategic update upon appointment could be a catalyst for the stock, Deutsche Bank agrees. The guidance implies FY16 earnings of $19-23m, with the mid point around 16% below Deutsche Bank's original forecasts. Guidance also suggests a material skew to the second half.

The deferrals mainly relate to an existing UK wealth management client deferring a new system implementation to the second half. Still, the company carries costs to support these project and so the impact on margins is material. Deutsche Bank forecasts margins compressing 400 basis points to 17.5% in FY16.

Morgans suspects the downgrade will pressure the company to slow its rate of investment in international capital markets and downgrades FY16 and FY17 estimates by 20% and 13% respectively. This reflects lower services revenue for wealth management, higher losses form international capital markets and a slower win rate for new contracts on the basis of current management uncertainty. Morgans retains an Add rating and lowers its target to $4.97 from $6.10.
 

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article 3 months old

M2 And Vocus Join Brave New NBN World

-Merger substantially broadens service offer
-Superior counter bid unlikely
-Underpins success in an NBN world

By Eva Brocklehurst

Consolidation activity continues apace in the telecommunications sector with M2 Telecommunications ((MTU)) and Vocus Communications ((VOC)) the latest to announce a merger deal. This will expand M2 Telecom vertically and create a full services trans-Tasman telco, combining the fixed infrastructure and wholesale offerings of Vocus with the retail offerings of M2 Telecom. This latest deal book-ends three years of major acquisition activity in the sector, kicking off with M2 Telecom's acquisition of Primus in 2012.

Under the agreement, which is couched in terms of Vocus conducting the takeover, M2 Telecom shareholders will be offered 1.625 Vocus shares for every share they hold. M2 Telecom shareholders are expected to end up owning 56% of the combined entity. The M2 Telecom board has unanimously recommended the proposal, subject to no superior proposal being offered and the independent expert report.

As this is a vertically integrated merger, Citi envisages no obstacles for the Australian Consumer and Competition Commission. The ACCC announced in its review of the recent TPG Telecom ((TPM)) and iiNet merger that a future merger between the four major suppliers of fixed broadband - Telstra ((TLS)), Optus ((SGT)), TPG Telecom and M2 Telecom - would raise serious competition concern, so this probably limits the likelihood M2 Telecom would be acquired by one of its larger competitors.

Both merger partners expect around $40m in synergies can be achieved by FY18, with the potential to use the Vocus fixed infra assets to on-sell M2 Telecom's services. The combined group will have a market cap of $3bn and become the fourth telco in Australasia by market cap. Around 18% of FY15 proforma revenue would be from New Zealand.

Several brokers suspect the deal was structured this way to limit potential interference from TPG Telecom, which holds a 7.9% stake in Vocus. Overall, the combined group should offer significant operating scale and network. UBS suspects Vocus will use M2 Telecom's distribution network to penetrate existing on-net buildings, potentially with a dual brand strategy to avoid cannibalising the existing Vocus offering, which is positioned below Telstra but above TPG Telecom.

At current prices the market is valuing the merged company on a FY16 price/earnings ratio of 17, which looks cheap for an integrated telco, in the broker's opinion. To compare: Telstra trades on a ratio of 16 times and TPG Telecom on 27.5 times. UBS expects the deal will be around 10% earnings dilutive to M2 Telecom shareholders in FY16 and 37% accretive to Vocus shareholders, but acknowledges this is of limited relevance given the difference in the nature of the earnings streams. UBS, like Morgan Stanley, awaits the relevant approvals, including the NZ Commerce Commission, before factoring the deal into forecasts.

UBS believes it unlikely a third player will trump the proposal. TPG Telecom may be a candidate on first glance but it is already geared up following the acquisition of iiNet and the ACCC would likely to be wary, given the company is the number two player in the consumer fixed market. The deal should cement the combined group's success in a post-NBN world, where scale, extent of infrastructure assets and a differentiated product offering will be necessary.

The deal makes strategic and financial sense, in Morgans' view. This broker, too, concludes that the only way TPG Telecom could block the deal is via a full takeover of Vocus and, given the iiNet merger has just happened, the company's balance sheet is stretched. Morgans reduces M2 Telecom's rating to Hold from Add on the back of the news but makes no changes to forecasts. The combined business would generate around $370m in earnings on a FY16 proforma basis, with M2 Telecom bringing mass market appeal with its Dodo brand and business sales through its Commander sale force. Vocus brings strength from its substantial network footprint.

The downside risk is mostly around share price movements in Vocus, because of the all-scrip bid. Every 5c reduction in the share price removes 8c or 1.0% from the value of the offer, from M2 Telecom's perspective. Longer term, Morgans suspects some risk/reward in respect to the supplier relationship with Telstra and this will need to be managed carefully to ensure continuity of carriage. The only potential suitor outside the other big three, in the broker's opinion, could be Vodafone, or an energy distributor. Longer term, Morgans also suspects the $40m synergy target will be superseded. For example, the TPG Telecom bulls expect up to $200m in savings after the acquisition of iiNet.

Macquarie also considers it unlikely a second bidder will emerge. The broker expects the combined entity will improve competition in the consumer and business market by creating another scaled up player in a market dominated by the other three majors. The combined group will have 510 DSL enabled exchanges in Australasia, a submarine cable capacity connecting its network to the US, Hong Kong and Singapore and complete coverage of NBN in Australia and UFB in New Zealand.

FNArena's database has two Buy ratings and four Holds for M2 Telecom. The consensus target is $9.85, signalling 9.4% downside to the last share price. This compares with $9.92 ahead of the announcement.

 

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article 3 months old

Will iiNet Give TPG Indigestion?

-Synergies may take time
-Gaining share in corporate
-Strong cash conversion
 

By Eva Brocklehurst

TPG Telecom ((TPM)) has pulled off a strong FY15 result and is now tasked with incorporating the acquisition of iiNet. Departing from usual practice, the company provided no guidance at its result other than to signal organic growth would continue in FY16. This could well be because iiNet is a sizeable chunk and only in the early stages of integration.

Morgans will wait for the AGM in December for an update on how iiNet is tracking as it is too early to judge the synergies, or factor it into estimates. This is a key point in the risk/reward equation for TPG shareholders. While iiNet should create value, the broker considers this is implied in the share price already.

Morgans forecasts around $150m in iiNet synergies but expects these will be extracted over a number of years. TPG is a quality business but the broker struggles with the price. Hence, a Reduce rating and $7.55 target.

Synergies with iiNet may take time to be realised, maybe up to five years, but should not be underestimated, in Citi's opinion. The company added 39,000 broadband customers in the second half and the composition of these additions is shifting towards the National Broadband Network. There were incremental gains in voice bundles and the company appears readily able to gain customers at a higher revenue per unit contribution. All favourable trends, Citi maintains.

All up, TPG is enjoying robust revenue and earnings growth, underpinned by market share gains and infrastructure synergies to be had. Corporate momentum is strong. TPG flags, on a pro-forma basis, AAPT accounted for almost half of the additional $83.3m in earnings achieved in the corporate division. Nevertheless, Macquarie finds the underlying growth rate hidden in the context of associated synergies from the AAPT acquisition.

Mobiles disappointed the broker at the margin, as TPG rolled out a new 4G wholesale contract. While the mobile business remains under pressure, with earnings down 18.4% in the second half, this is small in the context of the whole business. Macquarie acknowledges mobiles contribute just 3.0% to group earnings.

Macquarie downgrades to Neutral as the stock has performed well recently and the valuation has become a challenge. A favourable decision on wholesale pricing from the Australian Competition and Consumer Commission could add another 10-20c per share but the near term upside is still limited, the broker asserts.

Cash conversion was strong at 102% for FY15, while capital expenditure was ahead of guidance at $153m. FY16 capex will remain elevated, Macquarie notes, as it will include spending on both TPG's business and iiNet as well as a revamp of the Glebe office. The broker forecasts $250m in capex in FY16 as the company continues to build out its infrastructure as well.

TPG is Morgan Stanley's number one pick in the telco sector. The company has an advantage in vertical integration and the broker expects it to win more corporate market share. The broker's attention has been snared by the fact the company delivered $60m in incremental organic revenue ex AAPT, which in the broker's survey suggest TPG is now taking market share in the corporate segment.

Morgan Stanley conducted its AlphaWise survey of over 200 businesses in Australia and the data suggest TPG is well positioned. With a more price sensitive environment, which leads to lower customer loyalty, this paves the way for TPG to gain market share.

The broker expects TPG to generate FY15-18 compound earnings growth of 22%, a 64% premium to the sector. If the ACCC proceeds with its current 10% reduction in Telstra's ((TLS)) regulated fixed product, this could add $30m to TPG's FY16 earnings.

The company's fibre-to-the-building network should provide a significant competitive cost advantage and life earnings margins over time as well as additional market share. This is why Morgan Stanley has an Overweight rating on the stock.

There are two Buy ratings, two Hold and one Sell (Morgans) on FNArena's database. The consensus target is $10.01, suggesting 4.8% downside to the last share price.
 

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article 3 months old

Bulletproof Hitting Targets

-Margin expansion with scale
-Services for customers in transition
-Acquisitions broaden customer base
 

By Eva Brocklehurst

Cloud hosting service Bulletproof Group ((BPF)) is hitting its targets. More and more of the company's customers are moving to cloud-based applications. Average revenue per unit in the AWS (Amazon Web Service) division is now estimated at around $5,000 a month and rising. Some customers are spending upwards of $20,000 a month.

Consulting engagements are also becoming more complex and driving the company's revenue growth. Bulletproof recently acquired Infoplex for $3.55m, a highly accretive addition which provides another 25 quality customers. This is a managed, private cloud-hosting business which was considered non-core to the owners with Bulletproof the best placed to service the existing client base.

Researcher Microequities expects the managed AWS division will continue to expand and account for 50% of FY16 recurring revenue and 56% in FY17. New customer additions may be slowing per month but recurring spending continues to grow. The company will also benefit in FY16 from a full-year contribution from owning Pantha Corp.

Strong organic growth of 49% over FY15 is testament to Bulletproof's business potential while substantial margin expansion is expected from FY16 onwards because of increased scale. Net profit in FY16 is now forecast to be $1.8m versus $500,000 in FY15 while net profit margin is expected to rise to 4.4% from 1.7%.

Over the long term the broker expects operating margins of 20% are still achievable. Forecasts for operating margins have increased to 16.1% in FY16, largely derived from the inclusion of Infoplex. Microequities has upgraded its rating to Buy with a target of 40c, a premium of 25% to the last traded price of 32c.

The mix of services may change. Dedicated hosting is considered a transitional path for some customers while they become comfortable with the idea of outsourcing applications. They may then move to a public cloud environment in the future. For others, the security of data and privacy restrictions will prevent the use of a public cloud.

Microequities expects a 6.0% decline in the managed VMware division, excluding Infoplex, as customers transition. The net result is a minor reduction in revenue forecasts to $15.5m in FY16 from $16m. This still represents growth of 61% from FY15.

Over time the broker expects more back office functions such as accounting, sales and customer relationship systems will also move to the cloud.Transition to the cloud is beyond the scope for man IT departments and, hence, Pantha Corp offers consulting services in addition to Bulletproof's own consulting business.

Consulting revenue inclusive of Pantha Corp was $6.7m in FY15 compared with $2.7m in FY14. Bulletproof will leverage Pantha Corp's capabilities to develop managed applications that allow more automated deployment of applications for the AWS platform.
 

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article 3 months old

Weekly Broker Wrap: Mobiles, Retail, Insurance And The Australian Dollar

-Handset repayments need scrutiny
-Competition tougher for supermarkets
-Homemakers top non-food retail
-Majors lose share in life insurance
-Pressure on AUD continues
 

By Eva Brocklehurst

Mobiles

Mobile sector activity was modest in August, with price cuts by all four major operators. Macquarie expects service revenues can continue to grow over the medium term, given the increasing demand for data. Rates of growth may be slower, nonetheless. The broker believes the current trends warrant close attention with regard to revenue per unit and handset subsidies.

Optus ((SGT)) and Vodafone reduced monthly handset repayments by an average of 5.0% and 6.0% respectively over the last two months. This is a turnaround from a rising trend since 2013. Morgan Stanley also believes this should be monitored, as it could negatively affect industry profitability, particularly when combined with a weakening Australian dollar. Most handsets are priced in US dollars.

Both brokers will be monitoring the launch of the new iPhone this month, particularly in the case of Telstra ((TLS)), which continues to increase handset repayments on average. Morgan Stanley forecasts Telstra will maintain a 40% mobile earnings margin in FY16 and decreasing handset repayments would likely have a negative influence.

Retail

Australian supermarket margins are unwinding and Morgan Stanley concludes consensus estimates remain too optimistic. Global average supermarket earnings margins are around 3.0%, compared with 5.4% and 7.8% for Woolworths ((WOW)) and Coles ((WES)) respectively.

The broker lowers earnings margins for FY20 for Woolworths and Coles to 5.5% and 4.7%, respectively. Morgan Stanley observes that the discounters' market share in Australia is only just going back to 1990's levels, a time when Bi-Lo, Franklins and Food for Less were in operation.

Aldi and Costco may appear to be aggressively taking share but at the 15% forecast by FY20 this remains less than the share of 20% the formerly mentioned discounters enjoyed. Nevertheless, Morgan Stanley expects the two new arrivals will achieve a similar market share and the Australian market is over-estimating the ability of the established chains to react.

Morgan Stanley calculates that returns for Australian supermarkets are high by global standards but are now decreasing. This has attracted players into the industry with deep pockets and vast experience in operating in different markets, with low return hurdles and disruptive discounting models.

Meanwhile, in the non-food department, Deutsche Bank considers conditions are the best they have been for some time. Non-food retail is growing at its fastest rate since 2008, which the broker attributes to strength in housing and some benefit from a weaker Australian dollar. However, not all categories are equal. Harvey Norman ((HVN)) is the broker's top pick, given late-cycle benefits from its exposure to homemaker categories.

Flight Centre ((FLT)) is attractive because of its valuation and improving outlook, while Dick Smith ((DSH)) also appeals on valuation. Wesfarmers is not considered cheap enough, although a solid FY16 is expected. Myer ((MYR)) has fallen since its FY15 results and, while there is still execution risk, Deutsche Bank notes some balance sheet head room and upgrades to Hold from Sell.

Retailing is about to get harder, in Credit Suisse's prognosis. The household goods sector may have a relatively more favourable outlook and should remain strong over 2015. Growth is expected to slow in other areas with the broker noting both clothing store sales and groceries weakened through the second half of FY15.

JB Hi-Fi ((JBH)) was the only company in the listed household goods sector to record an expansion in gross margin in FY15 for its Australian operations. Credit Suisse warns that consensus earnings forecasts for FY16 fell consistently throughout the past 12 months for the majority of retailers.

Insurance

Macquarie has reviewed and ranked Australian general insurers on premium growth, margin, capital flexibility and risks. QBE Insurance ((QBE)) tops the order of preference, with currency and interest rate tailwinds. Suncorp ((SUN)) is second, with strength in value metrics and the best expense ratio. Insurance Australia Group ((IAG)) brings up the rear and appears constrained without an imminent capital return, amid concerns about profitability of opportunities in Asia.

Changes in the remuneration of life insurance providers will start to take place in the lead up to the effective introduction of new requirements from January 2016. As reform takes place and lapse/claim challenges settle, UBS believes AMP ((AMP)) is right to prioritise margin over growth.

There are no signs the major players are stepping up to take back market share in life insurance. The broker observes AMP, National Australia Bank ((NAB)) and Commonwealth Bank ((CBA)) have given up 4.0% market share over the past two years. UBS does not expect this trend will turnaround in the medium term.

As a result, in-force growth for the three remains in a negative 1.0% to plus 2.0% range. UBS accepts, as new remuneration structures gain broader market acceptance, this may change. Still, the broker continues to forecast low single-digit in-force growth for AMP out to 2018.

Australian Dollar

With China and the rest of the global economy likely to stay weaker for longer, Asian currencies will probably fall further, analysts at Commonwealth Bank maintain. The Australian dollar is now expected to ease to US65c by the first quarter next year. The analysts foresee a risk for a larger fall to US60c in 2016.

The main reason underpinning the downgrade to forecasts is a pushing back of economic recovery in China. 2016 GDP growth is forecast to be 6.5%, down from prior forecasts of 6.9%. The main drag on China is decelerating growth in heavy industry and poor export growth, reflecting weak external demand. A hard landing for China is not expected, however, because a significant amount of policy stimulus is in place.

Other reasons for downgrading forecasts include the fall out for Asian economies from the easing back of growth in China, and the likelihood of subdued commodity prices as global demand fails to recover swiftly, following the largest global mining investment boom in four decades which continues to generate increased global supply.
 

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article 3 months old

Buying Support For M2

By Michael Gable 

The Australian market is still preoccupied with the Chinese share market. A mature share market making big moves based on a market which is still very immature. We know that markets are not representative of economies. A case in point is that until the Chinese market took off a year ago, it had been trending lower and lower since the GFC. This is despite GDP growth rates in the high single digits. With growth currently 7.3%, the lowest it has been for 20 years, we are still looking at remarkable growth from the world's second largest economy.

When the emotion dies down over the next few weeks, and overseas funds recognise how cheap Australian shares are (the Aussie dollar is trading under US$0.70. Falls in the market plus falls in the currency means huge savings for overseas investors), we will be resuming the upside.
To take advantage of this opportunity, we reiterate that the following two types of stocks will likely outperform the market:

1. Large cap stocks (especially those with a good yield)
2. Companies that reported very well in August

An example of the second type of company is M2 Group ((MTU)), which is covered in today's report.
 


Five years ago, MTU was trading under $2 so it has come a long way during this time. The longer-term trend is still to the upside so it is simply a case of identifying when to buy in the dips. The last time that MTU underwent some consolidation was earlier in the year when it broke out in January and then rallied from about $8 to over $11.50.

It has now come back to this consolidation zone so there should be some support here. We have also seen a buy signal on the RSI and the MACD is close to showing a crossing also. For the short term at least, we expect some buying support to now come back into MTU. There will be some resistance at $10 and then strong resistance higher up at $10.50.


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

Brokers Welcome BigAir’s Transformation

-Timing of synergies uncertain
-More clarity on segment trends
-Acquisition opportunities abound
 

By Eva Brocklehurst

BigAir Group ((BGL)) has laid strong foundations for FY16, as it continues to transform into an integrated managed service provider. The FY15 results may have been messy but the company has been busy, investing in, and building, its management team.

Strictly speaking, profits were down in FY15 but trends are heading in the right direction, brokers maintain. The earn-out from an acquisition that was performing better than expected delivered the surprise reduction to profits. That aside, Morgans was impressed with growth in cash flows.

Any downside risk comes from realising the value inherent in acquisitions and Morgans accepts uncertainty about timing creates volatility in the short term. The broker assumes a mild lift in profitability in the near future, and notes it often takes 18-24 months for synergies to ultimately flow through to the bottom line. The broker also lowers the dividend pay-out ratio, assuming the company will progressively increase the dividend over coming years rather than stick to a specific pay-out ratio.

Cloud and managed services delivered an impressive 185% in underlying earnings growth, largely through acquisitions. Morgans believes the company is well placed, basing forecasts off annualised second half FY15 earnings, to gain a starting point of $21m for FY16. The broker has an Add rating and $1.02 target.

Moelis remains cautious on the level of organic growth and cross-selling opportunities, as long-term success depends on continued synergy benefits from acquisitions, particularly when growth ebbs in the fixed wireless business.

As there is limited growth available in fixed wireless the broker believes the intention to integrate as a technology provider is an appropriate long-term strategy. BigAir is targeting niche markets which larger competitors do not service effectively. Opportunities abound on the acquisition front too. The broker does not find the current valuation demanding and upgrades to Buy with a target of 92c.

Credit Suisse upgrades profit forecasts for FY16 by 9.1% to reflect the latest IT contributions. The turnaround in revenue growth in fixed wireless is considered a major positive.

The broker suspects the first half result will demonstrate the extent of revenue and margin upside in the company's cloud and managed service strategy. This is a driver of Credit Suisse's above-market forecast and the stock is expected to re-rate over the next 6-12 months. Other catalysts include further acquisitions, which are considered highly likely.

Having built successful franchises in fixed wireless and community broadband the broker believes the company is well able to build scale in its third sector, the cloud and managed services. Five businesses in this area have been acquired over the past 18 months in order to provide scale and product capability.

Extra disclosure around divisions has been helpful. Understanding the trends previously has been difficult and the extra clarity should bring new investors to the stock, Credit Suisse maintains. The broker has an Outperform rating and 97c target. 
 

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article 3 months old

SMS Management Positively Surprises

-Dividend surprises
-Margin expansion potential
-Strong pipeline of work
 

By Eva Brocklehurst

SMS Management & Technology ((SMX)) delivered one of the more upbeat earnings reports of the season, signalling a weak prior year has been cycled. Acquisitions also underpinned the results. Issues surrounding working capital in the first half dissipated in the second half and the full year dividend of 17c was also above forecasts.

The 36% growth in earnings and dividends impressed Morgans. Operating cash flow was up nearly fourfold. Of most significance is the return to organic growth. The broker is now confident the worst is behind the company and upgrades to Add from Hold, believing now is the time to get back on the front foot with the stock.

Change is the only constant in the IT industry, Morgans observes. On this subject, as a business which provides management advice on IT changes, SMS Management's own restructure has been a key selling point. The strategy is to shift the business mix towards managed services and solution development, with potential acquisitions being actively sourced.

A number of changes were made in Victoria, the main driver of earnings but recently a weak area, which now means all geographies are growing. The stock is trading on a price/earnings ratio which is below the market but offers well above market in terms of organic growth on Morgans' estimates. The broker upgrades FY16 and FY17 estimates by 18% and 16% respectively.

There was little wrong with the results, UBS observes. If nit picking, the only item which was amiss was the expected uplift in second half consulting utilisation did not occur, although at 84% it was still an improvement on FY14's 80%.

The company has around 25-30% of its targeted revenue secured for FY16, versus the historical levels of 10-15%. Large opportunities are also observed in the pipeline of work. 

Management has signalled second half margins are a good starting point for FY16 and UBS suspects, with a slight uplift in utilisation and further cost initiatives, margins could well expand further in FY16 and FY17. UBS also upgrades to Buy from Neutral on the back of the results.

Morgan Stanley reiterates an Overweight rating following a result which beat expectations on several fronts. The broker hails the first meaningful upgrade to the outlook after a prolonged down cycle.

Macquarie liked the news too, with margin growth ahead of expectations and a gradual improvement expected as FY16 unfolds. Earnings visibility in the traditional consulting service may be limited but the shift towards managed services provides annuity revenues and gives the broker more confidence in the near-term performance.

The result was improved by $1.8m in forfeited performance rights which were written back into accounts, Macquarie points out. Managed services now account for 10% of revenue and in FY16, short of the 25% target, but the broker suspects the group will attempt to achieve this target through acquisitions in FY16.

Macquarie commends the restructure, where sales teams are divided by industry verticals rather than regions, noting improved margins for the first time since 2011. The broker's valuation is broadly in line with the emerging leaders industrials market and a Neutral rating is retained.

Goldman Sachs, not one of the eight brokers monitored daily on the FNArena database, upgrades earnings estimates by 20-22% but also retains a Neutral rating given the stock's limited visibility and cyclical nature. The broker suspects the changes to the sales structure could still prove disruptive in the short term.

FNArena's database reveals three Buy and one Hold rating. The consensus target is $4.54, suggesting 5.0% upside to the last share price. This compares with $4.04 ahead of the update. The dividend yield on FY16 and FY17 forecasts is 4.7% and 5.1% respectively.
 

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article 3 months old

Brokers Welcome Scope For Larger CSG Ltd

-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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