FY10 43% growth forecast and FY11 69% growth forecast= 112% over...

FY10 43% growth forecast and FY11 69% growth forecast= 112% over next 12 months!!

Macquarie research done 15/07/2010. Note SP now lower.

Acquisitions driving FY11 growth: We preview CSG's (CSV) FY10 result, which is due to be released on 17 August. We forecast FY10 net profit after tax (NPAT) of A$32.1m. The balance sheet will be in focus at the result as well as the acquisitions delivering on expectations. Maintain Outperform.

CSV
Outperform

Closing price at 14 Jul 2010
$1.92
12 Month target price $2.97
12 Month TSR +58.6%
Valuation: $2.97 - $3.39
Dividend Yield 2.9%
Volatility: High

We forecast FY10 NPAT of A$32.1m, up 43% from A$22.5m in FY09. We expect CSG to deliver a strong 2H in the core Australian print business and a solid performance in Managed & Enterprise services. CSG has closed over A$100m worth of annuity revenue contracts in its IT Services business in 4Q in NT, NSW and VIC. While this is positive news, rather than providing significant earnings upside, these contracts are required to maintain work-in-hand as other contracts roll off.

Balance sheet in focus
Two acquisitions and two equity raisings is a lot for any company to digest within a short period of time. We expect post consolidation of LSL and KMBS and associated working capital funding that net debt will be A$6570m for FY10, gearing (net debt/equity) at 34% and net debt-to-earnings before interest, tax, depreciation and amortisation EBITDA at 1.2x. This does not include the NZ$130m LSL finance book.

Focus on acquisitions delivering to expectation
KMBS is expected to deliver ~A$60m of revenue in 2H10, and we estimate A$8m of EBITDA. Canon is expected to add A$75m of revenue, which we estimate will translate into A$15m of EBITDA (or 25% increase on FY10 base).

These acquisitions are the key driver of our earnings forecast in FY11; hence, the delivery of earnings to expectation would be a key focus for the market at the FY10 result.

FY11 forecast 69% NPAT growth
We forecast A$54m of NPAT in FY11 primarily driven by a full-year impact from KMBS and Canon. If we strip out the impact of acquisitions, we forecast A$47m of EBITDA for the base business, down 8% on FY10 forecasts we have assumed some margin erosion from the ramp-up of new IT services contracts awarded in 2H10.

Maintain Outperform
We expect the market will be focused on acquisition performance and the balance sheet at the FY10 result, and we tend to agree these are the two key risk areas for the stock.

However, CSG is trading at an undemanding FY11 price-to-earnings ratio (PER) of 8.5x [now lower] and remains in value territory, in our view.