High-Yield Aussie Tech Play Winning Contracts From Major Players (IBM, ACN, AAPL, BHP)
David Dittman:Â We are long past the point where information technology (IT) and systems management products, services and consulting are revolutionary aspects of business life. Computers have been part of the corporate world for decades now, the Internet revolution is a thing of the 20th century and companies that havenâ€™t adapted for this new age are Dodos walking.
At the same time, there are issues impacting business performance that require a similar level of technical skill and insight but that have nothing to do with computing per se. In short, there are business problems that require an outside perspective.
Melbourne, Australia-basedÂ SMS Management & Technology LtdÂ (SMSUF) specializes in improving operational performance and IT delivery, everything from business integration to compliance, process improvement to change management and technology strategy to systems integration and application development.
SMS helps businesses innovate to solve their particular problems. More important, it helps them sustain and improve operations so they can remain going concerns.
It has two basic operating units, one that provides professional services through a large professional workforce with diverse subject matter expertise and another that places information technologists with businesses on a temporary basis, typically in response to employee absences, temporary skill shortages and specific technical projects.
Contrary to cynical caricatures, SMSâ€™ consultants and IT professionals do a whole lot more than find more work for the firmâ€“although, as a by-product of their success this is whatâ€™s happening. The business is performing well given the short-term environment, and itâ€™s delivering very good results.
During the 12 months ended Jun. 30 SMS posted a net profit of AUD30.6 million (USD 31.75 million), up 3 percent on the previous 12 months, while revenue was 10 percent higher at AUD335.8 million (USD 348.49 million). The growth is more modest than last year when the companyâ€™s sales surged 23.6 percent.
Earnings before interest, tax, depreciation and amortization (EBITDA) grew 5 percent to AUD44.3 million (USD 45.97 million); last year EBITDA rose 10.8 percent to AUD42.2 million (USD 43.79 million). SMS Consulting EBITDA grew by 7 percent, while M&T Resources EBITDA shrank by 14 percent.
SMS will pay a final dividend of AUD0.17 (USD 0.1764) per share on Oct. 26 to shareholders of record on Oct. 5. The shares will trade ex-dividend as of Sept. 28. The final dividend is up 3 percent over the prior corresponding period. Its full-year payout of AUD0.305 (USD 0.3165) per share is 2 percent higher than in fiscal 2011.
This final dividend figure represents 68.1 percent of earnings per share, at the midpoint of company policy to pay 65 percent to 70 percent to shareholders.
During its presentation to analysts and investors management noted that EBITDA and earnings per share have grown every year over the past seven but one, during fiscal 2009, the height of the Great Financial Crisis. And even during that period SMS maintained its dividend, a sign of its consistency and dependability.
SMS continued to add market share in fiscal 2012, about 3 percent according to internal research, and for almost a decade now itâ€™s posted a compound annual growth rate of about 20 percent. Managementâ€™s approach to expanding the business through bolt-on acquisitions that expand capabilities has been sound, as these deals contributed about 7 percent of overall growth.
SMSâ€™ balance sheet is debt-free, with AUD30 million (USD 31million) cash in the bank. Management noted improved profitability during the second half of the year, a result of a program to strip about AUD2 million a year of costs out of the organization. Staff levels for the year remain largely unchanged at 1,682 after strong headcount growth of 22 percent in fiscal 2011.
According to chief executive Tom Stianos market conditions during the year were â€œvolatile,â€ but the company still managed to sign AUD392 million (USD406 million) worth of contracts, 12 percent higher than the year before. Health care, utilities and information and communications technology (ICT) were its strongest performing industries, picking up the slack from weaker financial services and government spending.
ICT and financial services, despite contracting during the year, were the top revenue generators, contributing 18 and 17 percent of overall sales, respectively. SMS noted in its annual report that state government demand was flat, particularly in New South Wales and Victoria, which it said was likely to continue. Demand from the utilities and resources sectors picked up, however, offsetting these weak areas.
Reduced technology investment in the financial services sector wasnâ€™t surprising, as the Big Four Banks recently completed major systems upgrades. CEO Tom Stianos highlighted mobile and social trends to deliver a rebound towards the end of the first half.
â€œSmartphones and tablets have already surpassed personal computers as the primary access to systems and most organizations, especially banks, have to re-engineer how they engage with customers,â€ noted Mr. Stianos. â€œThat has a profound impact on their processes and back-office systems.â€
M&T Resources, the staffing division of SMS, also underperformed, which management blamed on a soft permanent recruitment market caused by a general weakness in business confidence. Mr Stianos said this was due to global economic fears but he remained confident about the year ahead. â€œThe long-term is very positive but in the current period sentiment is being influenced by European concerns,â€ he said.
With AUD30 million (USD 31million) in the bank management also said that it continues to hunt for strategic acquisitions, having made no purchases in the past 18 months. It also plans to focus on a series of market â€œhot-spots,â€ including â€œbig data,â€ cloud computing, and mobility to underpin its search for growth in fiscal 2013.
Its international expansion model is based on â€œfollowing Australian clients into Asia.â€ The company has been notably risk-averse in its Asian expansion, eschewing speculative openings of new offices in favor of following customers and helping integrate new systems and processes into existing setups at home.
Itâ€™s done this through major contracts withÂ Telstra Corp Ltdâ€™sÂ (TTRAF) international division in Hong Kong; by helping Australia & New Zealand Banking Group LtdÂ (ANEWF) execute on its â€œsuper-regionalâ€ strategy; and via work with BHP Billiton Ltdâ€™sÂ (BHP) MinEx division in Singapore.
Eighty-five percent of the top 20 companies on the Australian Securities Exchange (ASX) use SMS services.
In the immediate aftermath of the Great Financial Crisis SMS helped Hong Kong-basedÂ Cathay Pacific Airways LtdÂ (CPCAF) implement a large-scale technology solution that fundamentally changed the way the airline operated across its ticketing, airline inventory, reservation and departure control businesses.
It also helped ANZ, with operations in 22 countries in the Asia-Pacific streamline processes across each of its money laundering reporting officers (MLRO) by converting policies into sustainable work practices.
SMS also consulted on ANZâ€™s development of an application forÂ Appleâ€™sÂ (AAPL) iPhone that allows customers to carry out a number of banking transactions and to pay someone by using just their mobile phone number.
Victoria-based Water utility Lower Murray Water engaged SMS to develop and implement an enterprise data warehouse, including the provision of a data management and transfer system to integrate with the Australian Bureau of Meteorologyâ€™s Australian Water Reporting Information Systems.
And last month Medibank, an Australian government-owned private health insurer, hired SMS to support its recent contract win with the Australian Defence Force (ADF). As of Jul. 1, 2012, Medibank is managing and coordinating health care services for all serving ADF personnel nationally, from point of injury or illness through to recovery.
The company also benefits when graduates of its shop move on and into in-house, full-time engagements with companies; thatâ€™s in part how the arrangement with Cathay Pacific came about, and it also hooked up with China Light & Power due to an alumnus reaching out for consulting work.
Furthermore, the SMS business is focused on non-discretionary value-adding services; it tends to be deep into companies it works with, doing mission critical things, very operational and very essential to their business performance and their product development.
Over the past six years SMS has launched a number of specialized practices and has acquired some boutique businesses to jump-start these operations; these efforts have allowed it to expand the range of services it can offer existing clients. This has been the primary means of growth, as opposed to the less cost-effective strategy of regularly trying to win brand-new clients.
It also has minimal exposure to sectors that have been somewhat more volatile and less dependable, such as retail and manufacturing. The sectors SMS does focus on basically depend on IT to represent their core business. Itâ€™s not just an add-on cost for them.
To deal with immediate market conditions SMS emphasized those sectors that continue to show signs of strong growth, such has health care, telecommunications, resources, energy and water and other utilities. Management, in addition to holding the line on consulting staff during fiscal 2012, also shifted capacity, reassigning personnel from areas such as financial services, where it has quite heavy involvement, to areas with the stronger demand.
And itâ€™s also increased services to clients to help them reduce their costs. So when clients want to cut back budgets thatâ€™s not an automatic signal that SMS isnâ€™t going to get work. Itâ€™s just a signal and a different sort of work. SMS helps them answer questions such as how to reduce costs, how to improve process efficiency, how to increase revenue.
Thus its business process management, operational cost reduction and business performance improvement practices have all seen strong growth, and theyâ€™ve capitalized on the triggers that one might think are signs of contraction.
With a market capitalization of about USD400 million SMSÂ looks like a forgotten crumb relative toÂ IBM (IBM), at about USD210 billion, and evenÂ AccentureÂ (ACN), at about USD42 billion.
But despite this unfavorable and superficial size comparison SMS has managed to establish what amounts to a subscription/fee-based business that relies on contractual relationships with major Australian companies.
It doesnâ€™t quite rise to the level of an â€œessential serviceâ€ but an impressive share of cash flow is â€œrepeatable,â€ meaning itâ€™s locked in under long-term contract.
David DittmanÂ is co-editor ofÂ Australian Edge, along with his longtime mentorÂ Roger Conrad. Davidâ€™s valuable contributions on economic, regulatory and legislative changes help subscribers make informed decisions about investing in high-dividend-paying Australian and Canadian companies.Â David authors the companion toÂ Canadian Edge,Â Maple Leaf Memo, which provides regular commentary on and analysis of macroeconomics, geopolitics, global trade, central banking, domestic politics and other issues related to investing in the Great White North. He also serves as co-editor ofÂ Big Yield Hunting, a service for aggressive investors that guides its subscribers to high-risk, high-return dividend plays each month. David regularly contributes toÂ Personal Finance, Investing Dailyâ€™s flagship newsletter.Â He has been associate editor ofÂ Canadian EdgeÂ as well asÂ Utility ForecasterÂ for seven years. He began his career at Investing Daily as deputy managing editor before serving as managing editor and then executive editor.Â David is co-author, along with Elliott H. Gue and Yiannis G. Mostrous, ofÂ The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, which was published in August 2010 by FT Press. He also edited Mr. Gue and Mr. Mostrousâ€™ previous book,Â The Silk Road to Riches: How You Can Profit by Investing in Asiaâ€™s Newfound Prosperity, which was published in 2006 by FT Press.Â David is a reformed lawyer with a juris doctor from Villanova University School of Law. Heâ€™s also a former stockbroker who worked the fixed-income desk for a two-man team managing more than $100 million in assets.