A 48% fall in profit to $14.3 million for the full year showed FY09 was a tough time for IT group Oakton (OKN), the year being marred by a sharp downturn in demand for the company's services at the same time as it was experiencing a blowout in contract costs.
But as Bank of America Merrill Lynch points out in its post result review, the company has now restructured the business and this should see operating margins improve, while signs of improving demand for IT services suggest the worst is largely behind the group.
UBS makes the point the lower result for FY09 means the company is now cycling low comparable earnings, meaning earnings growth in FY10 and FY11 is likely to be above average. Already FY10 suggests some improvement as the broker notes the company is now running at 9.5% overhead costs to sales against the reported 10.3%, which implies around $1.5 million of cost savings are yet to flow through to earnings.
As well, the broker suggests even assuming flat sales in FY10 the fact the company has reduced staff levels implies it should achieve improved staff utilisation rates, which would indicate some improvement to earnings. To reflect this UBS has lifted its forecasts, increasing its earnings per share (EPS) estimates for FY10 to 24c from 22c and for FY11 to 28c from 24c.
Bank of America Merrill Lynch has similarly lifted its numbers to reflect an expected improvement in margins, its forecasts increasing by around 20% in both years to EPS of 25.5c and 33c respectively. In contrast, Credit Suisse makes relatively minor adjustments to its numbers, its new EPS numbers standing at 25.2c for FY10 and 27.9c for FY11. Consensus EPS estimates according to the FNArena database now stand at 24c and 27.5c respectively.
With a profile of improved earnings leverage to a pick up in IT services demand Bank of America Merrill Lynch sees the stock as a Buy at current levels and to reflect this it has lifted its price target post the result to $3.50 from $2.50. Similarly the changes to its earnings estimates post the result has seen UBS increase its target on the stock to $3.35 from $2.75 previously. At the same time it has upgraded to a Buy on the stock from Neutral previously.
Credit Suisse argues against turning more positive on the stock however (a view seemingly backed up by Macquarie) as its view is while there remains some doubt as to the group's future earnings growth outlook, the shares are unlikely to trade beyond a market multiple. Its $2.80 price target, up from $1.90, implies a FY10 P/E (price to earnings ratio) of 10.5x, which CS suggests is an appropriate discount to the the broker's small cap basket ratio of 12.6x. As a result, there is no change to its Underperform rating.
Overall the FNArena database shows a total of four Buys, two Holds and one Sell rating, the average price target increasing to $2.93 from $2.19. It should be noted not all brokers to cover the stock have yet updated for the company's earnings result.
Shares in Oakton today are stronger and as at 1200pm the stock was up 10c at $2.95. This compares to a trading range over the past year of $0.52 to $4.48.
OKN Price at posting:
$2.95 Sentiment: Sell Disclosure: Not Held
