Acumen Acquisition Drives Oakton Re-RatingFN Arena News - April...

Acumen Acquisition Drives Oakton Re-Rating
FN Arena News - April 30 2007

By Chris Shaw

After its half-year profit result in February beat the market's expectations broker were busy lifting forecasts for IT services company Oakton (OKN) and the company's latest acquisition of Acumen has encouraged more of the same, this time accompanied by a re-rating of the shares.

In the past week the stock has jumped from around $4.50 to current levels in excess of $5.30 as the Acumen purchase has brought forward growth some in the market had expected would take a couple of year to be realized.

ABN Amro takes such a position and on the back of the acquisition has lifted its FY08 EPS (earnings per share) forecast by around 10% to 32c, which suggests EPS growth of around 40% next year given the broker's estimate for current year EPS is 22.7c. This forecast was itself lifted slightly following the company's profit result in February.

Why Acumen is so attractive in the broker's view is it gives the company exposure to not only the Canberra market but also to possible contracts with the Federal Government, while also lifting the company's head count. This is important, as with more qualified staff the company can generate more work, so lifting earnings.

Management had targeted a total staff of 1,000 within two years but as the broker notes the Acumen deal makes that a reality now, hence the lift to future earnings expectations. The risk remains to the upside in the broker's view as the company is expected to continue pursuing other growth options, with further acquisitions considered likely.

The broker expects a minimum of 20% per annum earnings growth from the company for the next three years, which puts the stock on a prospective P/E (price to earnings) ratio of 14.6x in FY09, a multiple below the current market average.

Credit Suisse is even more optimistic and forecasts the company will achieve earnings per share of 43c by FY09, which implies a P/E of less than 12x. It too is positive on the Acumen deal as in the short-term it sees potential to lift margins through cost cutting while at the same time driving earnings growth through expanding the company's operations.

Merrill Lynch sees the acquisition as adding 10-12% to its forecasts for both FY08 and FY09, with further growth potential from expansion beyond its core markets of Sydney, Melbourne and Brisbane. It notes the industry outlook is also in the company's favour as growth for the IT sector as a whole is estimated at 5-7% annually and Oakton should benefit from its solid product offering and competitive pricing.

While not as aggressive as Credit Suisse in terms of earnings estimates given its FY09 EPS forecast is 34.7c, the broker sees enough upside to have lifted its price target to $5.60 from $5.22.

GSJB Were has made a similar increase, lifting its valuation to $5.39 from $4.80 at the same time as increasing its earnings per share estimates by 10.2% to 31.4c in FY08 and by 12.9% to 36.5c in FY09.

It expects organic growth to lift staff numbers by around 100 per year in the company's Australian operations and to 200 in India by FY09, which is suggestive of upside risk to earnings forecasts. Adding weight to its view is the broker's forecast for Acumen to double its EBIT (earnings before interest and tax) by FY10, an outcome it expects will prove conservative as while the initial impact of the acquisition will be a contraction in margins this should be remedied by FY09.

With higher earnings will come higher payouts to shareholders, GSJB Were forecasting dividends to increase from the 16.8c paid out in FY06 to 22c this year and 32.5c by FY09, putting the stock on a prospective yield of more than 6.0% in that year, which suggests the stock is still good value.

The market certainly thinks so, as Oakton shares have risen further in today's trading and as at 1.00pm were up 22c to $5.36, which compares to an average price target in the FNArena database of $5.78, up from around $5.20 prior to the Acumen deal. Thomson One Analytics notes the median price target for the stock is $5.04, based on median EPS estimates of 29c in FY08 and 34c in FY09. The FNArena database shows the stock scores four out of five Buy ratings, with Aspect Huntley rating the stock as a Hold.