[1]How long have you held ASG?
We first purchased IT services company ASG in mid 2010. The share price weakened over 2012 and 2013, with investors losing confidence. Today the share price is trading at a significant discount to peers, reflecting sentiment and perception issues, following a series of strategic missteps.
What is it?
ASG is Australia’s largest domestic provider of ‘IT managed services’ with particular strengths in Application Managed Services (Oracle, SAP) and Infrastructure Managed Services. The company was established in 1996 in WA, and benefited from the move towards selective sourcing by large corporate and government enterprises. The company also benefited from some dissatisfaction with Tier 1 Multinational service providers. This helped ASG build scale in its home market of WA, before the company acquired capabilities in consulting, business intelligence and SAP applications on the East Coast of Australia. ASG foresaw the current trend towards ‘solution’ based IT outsourcing (rather than technology focused) and began investing in an in-house cloud platform over the last 2-3 years. This cloud delivery complements ASG’s traditional managed services capabilities, and is now starting to gain meaningful traction with a series of multi-year, multi-million dollar contracts.
Why do you like it?
We view the current issues as temporary, rather than structural, and anticipate a share-price re-rating once management deliver on their promises to restore cash flow and reduce gearing.
The company has announced nearly $80 million of new contract wins since June 2013, giving us confidence the company’s fortunes are turning around.
[2]It has established credentials and accreditation, particularly around Oracle as well as a large number of customer reference sites.
It also has a large pool of multi-year recurring revenues offering good earnings visibility, with contract renewals running at a healthy 85% rate.
Revenue growth is more dependent on clients’ non-discretionary operational expense (opex) budgets rather than more volatile capex budgets.
How is it better than its competitors?
It’s the largest and best-credentialed domestic provider of managed IT services.
ASG’s long history of successful operations and associated depth of reference capability, offer significant competitive advantage over smaller or less established peers.
The business is built on a premise of reduced complexity and flexible delivery, which contrasts with the often bureaucratic and inflexible Tier 1 multinationals.
A relatively early adoption of Cloud delivery technologies, has positioned ASG well to capture a meaningful share of the market, as cloud adoption accelerates.
What do you like about management?
Chief executive officer Geoff Lewis has a long track record in delivering IT outsourcing solutions and has been with the company since founding it (with co-founder Stephen Tull) in 1996.
We like its proactive management style that is adaptive to evolving trends and its well-defined strategy, clearly linked to core competitive advantages in IT managed services.
It has displayed a willingness to acknowledge mistakes and rectify them and it also has a good depth of sector expertise across the executive team.
When would you sell it?
We believe the shares are substantially undervalued at current levels trading at 7 times forecast FY14 EPS and 3.7 times forecast enterprise value/EBITDA.
Our forecast EPS growth profile over the next three years, and the relatively defensive nature of the company’s revenues, suggests a much narrower discount to the market is warranted.
We view fair value for ASG on a range of metrics (earnings multiples and cash flow analysis) at around $0.70 a share.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Be a realistic optimist [3]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [4]
- James Dunn: Curtain call – supermarkets and airlines slug it out [5]
- Penny Pryor: Property and power [6]