IT company on cusp of revival

My original post on Tuesday now out of date and here is update (with some revisions) using current SP. Still decent value imo. Plus ASZ in legal dispute with Vic govt which i wasn't aware of when posting and while ASZ sez it won't have much effect of FY16 financial result, it is a concern.

Monday's update from DTL announcing a 25% increase in earnings prompted a powerful surge of buying with SP leaping 12% on large vols. DTL have been a fairly consistent small cap IT stk with regular divs. They provide a mix of product (hardware) and services to an array of customers in Oz along with an increasing amount of IT services including cloud. Cloud (included in 'product' category) is about 10% of total revenue and services some 19% of total. Margins for hardware/product are 9.3% and services 39.7%. DTL's strategy/priority is to 'grow and transition the core business towards services' and 'accelerate cloud opportunities' using its strong customer base. And I feel confident it can achieve this and grow profits in the yr ahead.
disclosure: i have a long position in DTL since about 2 weeks ago.

ASZ has a similar mkt Cap but with revenue at about 190m for FY16 it is less than a quarter that of DTL. However ASZ is all services plus cloud and their emphasis is providing IP. ASZ got into strife after making some bad decisions in 2013. Debt blew out to $30m and earnings fell. The past 2 yrs have been one of recovery with $20m of writedowns, debt reduced substantially and even a small share buyback in FY16. Divs have been suspended as part of recovery process and franking credits are lowish but increasing.

So historically DTL is a far safer and more reliable company. But I've done some figures/guesstimates for FY16 and 17 which show that ASZ is well into its comeback and a decent stream annuity/utility type earnings in place with divs set to resume soon. Like DTL this company has an exc spread of customers with 57% of work from govts. At yesterday's closing price of 98.0cents, I believe it makes good buying and I've got a biggish chunk in the long portfolio. Most of the info below is in public domain but the forecasts are my own calculations.

ASZ FY16

Revenue $189m
EBITDA margin 14.6%
EBITDA $27.5m
Operating cash flow $27.5m
Net Debt $2.7m
D&A is very difficult to guesstimate but lets say $8.3m
EBIT $19.2m
NPAT $13.9m
shares on issue: 201.8m
FY16 EPS 6.9 cents
Div. Might pay 1.0c ffr but don't depend on it.
In summary 2hFY16 considerably better than 1H.
Reports in 3 weeks time on Wed 17/08/16.
Using SP of 93.5c we get PE ratio of 13.55
EV/EBITDA = 191.4/27.5 = 6.96.

So a PE of 13.5 for stk that pays no divs is pretty ordinary. But I've been buying as i feel FY17 will be a bonza yr for ASZ.

Key Features.
Over $300m contracts signed during FY16 of which $130m is NEW business.
Enter FY17 with $180m "locked-n contract revenue".
Operating margins will increase as overheads largely fixed.
Company is 'budgeting for growth in FY18 off the back of current contracts'.
'New World' services (eg cloud) are replacing 'Old World' services and have doubled to 26% of rev in just 2 years.
Excellent spread of blue chip Aussie customers (43%) along with strong partnerships with State and Fed Govt departments (57%)
'Distinct first mover and client service advantage'. Their words not mine.

But for me the main key is:
ASZ (like DTL) has close relationship with large customer base from which it has developed a business producing 'strong, steady, sustainable utility type earnings via strong organic revenue growth'.

ASZ Forecast for FY17

Revenue $207m
EBITDA margin 15.8%
EBITDA $32m
Operating cash flow $32m
Net Debt: zero
D&A is very difficult to guesstimate but lets say $5m as capex should be less
EBIT $27m
NPAT $19m
shares on issue: 201.8m
FY17 EPS 9.4cents.......................................... a 36.5% increase over FY16.
Dividends: ASZ payout about 90% in divs so estimate 8.4c ffr
Gross div yield (SP 98c) is 12.3%.
In summary FY17 considerably better than fy16
Reports in 55 weeks time
Using SP of 98c we get PE ratio of 10.4.
EV/EBITDA = 197.7/32 = 6.2
disclosure: I hold ASZ in my long portfolio

These are my own calcs but i feel fairly confident esp as $180m rev for FY17 has been 'locked-in' and most contracts run for 4+ 4 yrs. The main reason behind the substantial 36% jump in profits is the multiplier effect when both revenue and margins increase.

New info: ASZ partner with Oracle re hosting in cloud. Here's some new info re Oracle and a massive merger/TO re the cloud sector.
http://www.cmswire.com/information-...2520%25249.3%2520Billion#.V5p9wYuhKNs.twitter