ThinkSmart’s Expansion Has Brokers Excited

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This story features WOOLWORTHS GROUP LIMITED.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

In what is now a global operating environment for many businesses the ability for a company to expand into new markets at relatively little cost is a huge advantage and one usually recognised by investors in the market.

A case where this advantage is not yet being priced into the share price of the company appears to be ThinkSmart ((TSM)), where both JP Morgan and ABN Amro have Buy ratings on the stock with price targets well in excess of the current share price.

Both brokers have reiterated their positive views on the stock following the company’s announcement it has launched its business to business transactions processing technology in Italy, marking an expansion in the European market. The company already operates in both Australia and New Zealand and is rolling out operations in both the US and Spanish markets as well, so ABN Amro sees the company’s growth outlook as strong.

The broker points out the entry into Italy highlights how it will be entries into new markets rather than like-for-like sales growth driving earnings growth in coming years with other European markets such as France, Greece and Sweden possibilities along with the substantial US market. JP Morgan suggests the group’s ability to expand into these new markets at low cost that will stand it well as it continues to grow.

There will also be continued growth in existing markets as evidenced by the intentions of ThinkSmart’s Italian partner, DSG International, to grow its store footprint in coming years, while the company’s recent win of a tender to supply support warranty services with Woolworths ((WOW)) in Australia highlights other available opportunities.

On their respective numbers both brokers see Italy as delivering a positive contribution to earnings in FY09 of around $0.4-$0.5 million in EBITDA (earnings before interest, tax, depreciation and amortisation) terms, with JP Morgan expecting this to double to around $1 million in FY10.

The key longer-term factor remains the US rollout and this is in its early stages as the group’s partnership with Office Depot evolves. JP Morgan points out the Italian entry is also significant as it is using the same web portal model to be used in the US, showing growth can be achieved at the same time as processing functions are streamlined and call centre traffic is minimised, so keeping costs down overall.

On the broker’s numbers the company should generate earnings per share (EPS) of 12.3c this year, 13.6c in FY09 and 17.5c in FY10, while ABN Amro is forecasting EPS of 8.97c, 9.79c and 18.9c respectively on a normalised basis. This compares to EPS in FY07 of 5.2c, Thomson One Analytics showing median EPS estimates for the company of 9c, 10c and 14c respectively for FY08-FY10.

Income conscious investors should also see some rewards as on JP Morgan’s numbers the company should pay out 5.9c this year, 6.8c in FY09 and 8.8c in FY10, putting the stock on a prospective yield of 4.9% in FY09 and more than 6% in FY10.

With a market capitalisation of just over $130 million the company doesn’t receive much coverage, the FNArena database showing only JP Morgan, ABN Amro and Citi researching the company. The latter currently rates the stock as a Hold having last month cut its earnings estimates to account for expected start-up losses in the US.

The average price target according to the database is $2.46 though this is impacted by Citi’s $1.77 target as JP Morgan and ABN Amro have targets of $2.90 and 2.70 respectively. The median price target according to Thomson One is $2.70.

Shares in ThinkSmart today are untraded with a last sale price of $1.38, which compares with a range over the past 12 months of $1.25 to $2.40.

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