Security price: $3.67
Industry: IT services
Forecast distribution: 14c per share fully franked
SMS Management and Technology is being hit by a cyclical downturn in IT spending, changing client buying patterns and strong competition.
But the company, which we last looked at back in 2014, has been performing well in that tough environment and is well positioned for a cyclical upturn.
With a solid balance sheet, a new CEO and an attractive dividend yield, we think SMS remains a good option for income-focussed investors.
Yes SMS is facing a tough environment. But the company is evolving its business model to meet that challenge.
SMS is moving to diversify its earnings to include not just its legacy roles of designing and building of IT, but also managing those IT services for organisations.
That should help the company diversify revenues, give it annuity-style income streams, and allow it to tap into high-growth areas such as cloud computing.
The company has a new CEO, former Infosys Australia boss, Jackie Korhonen, who should bring fresh impetus to SMS’s evolution.
SMS’s strategy in recent years has also been to make judicious acquisitions. Indicium and Birchman, which the company bought in 2013, have both exceeded agreed profit targets.
The company hands down its full-year results on August 19. We expect a solid result following a promising third quarter. SMS’s most recent guidance is for full-year revenue growth of between 9 to 12 per cent.
SMS has been winning contracts, which it says provides confidence for growth in 2016. In the first three months of 2015, SMS said contract wins had risen 17 per cent to $298.2 million, helped by strong growth in financial services, ICT and state government.
SMS also has a solid balance sheet with low levels of gearing, and to date management has taken advantage of share-price weakness to buy back shares.
The company paid an interim fully franked dividend of 7 cents per share. The full-year dividend payout is likely to be around 14 cents per share, fully franked.
That payout is due to rise to 20 cents per share in 2016, a strong yield of 5.4 per cent.
At $3.67, SMS is trading slightly below our forecast value of $3.76.
While the IT market is tough, SMS is in a solid financial position to weather current difficult conditions and be in a strong position to leverage a cyclical upturn.
There is incremental improvement in business confidence which is leading to an increase in contract wins and that should underpin performance.
At current prices SMS remains a good opportunity for investors looking for income.