upgarded to strong buy, page-14

Rosy,

Just a few caveats to your back-of-the-envelope calcs.

Firstly, I think $122m of EBITDA in FY14 is a bit of a stretch.

Remember that in FY13 the Workforce division went out hard to retain clients, meaning some contract renewals have been locked in at lower rates.

Also, in the Technical Professional division, Swan is cycling a very strong (a record, in fact) Dec half in 2011. Since then, things have become a lot more muted, specifically in the mining sector.

Finally, in the Marine Services divisions, OMSA last eyar was boosted by the peak in Gorgon work, which will taper off from June half 2014.

So, I think you'll find your $10m in additional cost reductions will be offset by some of the headwinds across parts of the business, induced by the sluggish economy currently being experienced and likely to persist for a few more quarters, I suspect.

So, I think FY14 EBITDA will come in closer to $113m to $115m, rather than $122m.

And then there's the matter of the ratio to guestimate FY14 NPAT...while its a good ready reckoner, it's limitations lie in its omission of some explicit financial parameters, namely:

1. Increased interest expense in FY14 vs FY13. This is because Broadsword is debt funded, and SKE will have signed over the first consideration cheque for $49m sometime in early July. This means that FY14 interest will be around $7.0m to 7.5m, I calculate, up from FY13's $4.1m.

2. Higher depreciation charge. Broadsword is a higher margin business (>20% EBITDA/Revenue) than any of the current SKE businesses, but it is more asset-heavy. Therefore, the depreciation charge will rise disproportionately faster in FY14 than EBITDA due to the Broadsword. I estimate FY14 depreciation expense at around $12m, compare to FY13's $10.1m

Explicitly modelling these parameters yields an EBITDA-to-NPAT factor of 1.70, compared to FY13's 1.62.

And on my more conservative EBITDA numbers, that results in FY14 NPAT of some $67m, or EPS of 28cps.

Valuation-wise, that's a P/E of around 11.7x, which is somewhat higher than your 10.5x, but which I still think undervalues the business quite materially.

Dividend-wise, while the balance sheet is still in excellent shape (Even though the December half is always the seasonally weaker half from a cash flow point of view, I still forecast annualised EBITDA/NIBD of less than 1.0x for DH2013, falling to 0.6x in JH2014), I think the board will be reluctant to set the DPS bar too high, too soon.

So I reckon they'll raise it by 1c per half year, to 8cps for the interim (pcp =7cps) and 10cps for the final dividend (pcp = 9 cps).

So a FY14 total dividend of 18cps places the stock on a DY of 5.4%.

Please don't think I'm trying to talk down SKE's prospects. I'm merely trying to refine some of the work that you did.

And yes, I might be too conservative in my analysis, but experience has taught me that companies that create expectations based on under-promising and over-delivery, tend to make for infinitely better, sleep-easy-at-night investments than companies that promise the world of blue sky upside, but end up disappointing their shareholders.

I've never been a fan of high-risk, high-return investing because I've observed more often than not that high-risk is mostly accompanied by either moderate, or even no, return.

Instead, philosophically I'm in the business of seeking out low-risk, moderate return propositions.

And SKE falls squarely into that category, in my opinion.

Cam