hungry for aquisitions

Hungry for Acquisitions

UXC has participated in industry rationalisation with a strategy to acquire and pool small but established IT Services companies to create greater operational scale. The group has been spliced together through a series of acquisitions each of which have earn-outs and were purchased on EBIT multiples of approximately 3 times. UXC's strategy involves maintaining the management teams of the businesses it acquires, ensuring each business unit is accountable for its performance while avoiding a clash of cultures often associated with acquisitions.

Management described the operating conditions for the June quarter as "solid" without further elaboration. Uncertainty surrounding the timing of new orders around financial year end makes it difficult to accurately estimate the June quarter impact. The recent decline in business confidence may result in some companies deferring IT expenditure especially in the important June quarter. If cash flows were impacted customers could defer spending.

Global advisory firm IDC identified selective outsourcing as a key growth area. Small and medium sized providers will benefit from a move away from large scale single vendor arrangements to specialised niche operators. However IDC suggests growth in this market is expected to slow as the market matures and competition increases, especially from off-shore providers.

The model of acquiring businesses and operating them independently is one that takes time to establish itself. It has the potential to be highly successful, however we prefer to adopt a conservative stance. UXC is trading on a forecast PER of 9.8 times FY06 earnings and a prospective dividend yield of 7.7% fully franked. We require a further discount to resume a positive stance, and prefer Volante (VGL) and Commander (CDR) at current prices. We have downgraded our recommendation from Buy to Hold.

Huntleys