What is the stock?
RXP Services Ltd (RXP, 81 cents).
How long have you held the stock?
Initial and (majority) position established mid 2015.
What do you like about it?
The business had turned around without the market fully appreciating the sustainability of improved cash flow, the reduced gearing and energised management. Contango completed our own financial model, conducted industry research and detailed internal research and then set about investing in the name.
Contango was also getting consistent continued industry feedback of better demand for IT services (from both unlisted players and from studying the results of listed competitors). This was further evidenced by many big businesses/government moving to mobile apps, moving to the cloud, upgrading Windows based software, self -service websites and embraced software that improved productivity (and helped to reduce costs). Sensible examples include mobile apps, self-service websites, digital marketing (pictures/videos) and ordering online.
How is it better than its competitors?
RXP has experienced management, is Australian owned and operated (and listed) and has a solid capital base. RXP is also smaller than some and there are more attractive to highly skilled IT staff that do not want to work for another multi-national player. RXP articulates a concrete business plan that embraces and then helps others improve as change comes through. RXP is also more project based and we actually think this appeals to many clients that might be wary of using outsourced managed services that many others offer.
What do you like about its management?
They are experienced, extremely straight talkers and have learnt from past mistakes in a highly-organised way. The business is also willing to invest in growth (and acquire) in a controlled way.
What is your target price?
$1.00 plus.
At what point would you sell it?
As and when RXP starts to approach multiples that other similar business trade on, or have been acquired at, and/or more in line with small cap market P/E multiples of the mid-teens.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
RXP has added circa 50% plus since we acquired it
Where do you see value?
Current prices are attractive. The business is on a consensus FY17 – P/E of 8.5X, which represents good value. The business has also issued guidance and just paid a 1.5 cent fully franked dividend for the 1H17. Note that it is only thinly covered by stock brokers. Risks include soft utilisation rates, competitor activity and a downturn in IT demand. Loss of key staff and poorly timed acquisitions also are risk factors in this business.
Source: ASX
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