OKN - Oakton Limited

[Baelish]

I'm not understanding the current gloomy market pricing of Oakton. Are they getting whupped by their rivals? Is there no room for growth because dividend levels have been set in too high? Assets are up, liabilities are down. The profit seems to be down by 11 per cent but the share price is down almost 60 per cent.

Is Mr Market just being a bit crazy or am I missing something here?

 

[ROE]

IT service market is highly competitive and the workers aren't cheap.

Good IT folks cost much much more than average pay and if you employ a bunch of these
guys and you don't have work for them it will cost you a fair bit of money.

You also need scale in this area of work, that way you can move people around if
you lose a contract here and gain a contract there, being small you don't have a lot of room
to move if you lose a contract here and there...

 

[robusta]

OKN is not the highest quality company in this sector but I like the strategy with the Indian facility.
This should negate the wage pressures to some extent.

At the end of the day they have to win contracts and do the job however.

 

[ROE]

They are too late to the Indian trend, if the did it 10 years ago yes but now there won't be much saving and the hassle, they will find out soon enough

And IT outsourcing lose it appear a few years ago....

Not saying it a bad business but macro factor doesnt stack well for small players in this area

 

[robusta]

I guess those macro factors are why this sector and OKN in particular appear cheap on most metrics.
Makes me want to look for other businesses in this space.

 

[robusta]

Don't often wonder about daily share price movements but OKN up over 5% today.

 

[robusta]

Was that it? AMP today announced they increased holdings, I thought for a minute a takeover was on the cards.
Anyhow I would have preferred the price stayed around $1.20 at least until the buyback is complete.

 

[Knobby22]

Its got everyone's interest now.

I bought some a few weeks ago but my order didn't fill.
I expect we will get a bit of a pullback and maybe a second chance.

 

[Baelish]

I'm looking to purchase some more OKN shares at the moment and ride it out in the long-term 'til the share price reaches a point I am satisfied in selling.

Would ordinarily be buying straight away, but I'm trying to educate myself a bit further on company fundamentals to get an inherent value (Roger Montgomery's book) before I get in.

Given that Montgomery and associates rated Oakton as an A3 investment in August 2011, and we've had a buyback and AMP increasing their stake, are you confident that OKN will get back to the realm of $2+ within a year, if business continues as normal?

 

[Knobby22]

Have to be careful here.

I think the business is underpriced because they had issues with the Melbourne office and teething issues with setting up the Asia site. I therfore think the price is justified to be more than it is now and $2 sounds reasonable.
On the bad side, IT labour prices are dropping as Indians are being used to do some of th work. Lower prices means even at greater margins, lower profits as a % of work. So I don't think they will hit their former highs.

 

[beatthemarket]

they just bought 1m shares yesterday in their buyback... good support for the shareprice and confirmation of a strong cash position. 75% dividend payout ratio provided in the guidance is also a good indication of their cash position...

 

[robusta]

they just bought 1m shares yesterday in their buyback... good support for the shareprice and confirmation of a strong cash position. 75% dividend payout ratio provided in the guidance is also a good indication of their cash position...

I just wish they would buy back more and faster at these prices.

Interesting little thing on the buy back announcement, highest price paid to date $1.22, highest price allowed under rule 7.33: $1.1077

 

[skc]

I just wish they would buy back more and faster at these prices.

Interesting little thing on the buy back announcement, highest price paid to date $1.22, highest price allowed under rule 7.33: $1.1077

$1.22 refers to all the stocks bought back. Highest price allowed under 7.33 is a moving target.

L/R 7.33 "A company may only buy back shares under an on-market buy-back
at a price which is not more than 5% above the average of the market price for
securities in that class. The average is calculated over the last 5 days on
which sales in the shares were recorded before the day on which the purchase
under the buy-back was made."

http://www.companysecretary.com.au/board_briefings/OnMarketShare.pdf

 

[robusta]

$1.22 refers to all the stocks bought back. Highest price allowed under 7.33 is a moving target.



http://www.companysecretary.com.au/board_briefings/OnMarketShare.pdf

Thank you skc I did not know that.

 

[RottenValue]

The reason the price is "cheap" is that the EPS now is about a 1/3 of what it was in 2008, in fact the forecast EPS for 2012 is 11 cents which is the same as it was back in 2005.

To get a SP of $2, you will need a P/E of about 20 for a company that has shown no real growth in EPS in 7 years. Not saying it wont happen but I wouldn't be looking at fundamentals on this one.

 

[Vader]

The reason the price is "cheap" is that the EPS now is about a 1/3 of what it was in 2008, in fact the forecast EPS for 2012 is 11 cents which is the same as it was back in 2005.

To get a SP of $2, you will need a P/E of about 20 for a company that has shown no real growth in EPS in 7 years. Not saying it wont happen but I wouldn't be looking at fundamentals on this one.

First up, I work for OKN and have recently bought shares... so no doubt I have a slightly rose coloured view of the world, so DYOR

Not sure where you get EPS of 11c for FY12, the reported first half results were 7c and the earnings guidance released recently said that 2nd half was expected to be about the same, so FY12 earnings is expected to be about 14c per share... it's also worth noting, that the first half figure included a one off payment of approx 2c per share from the result of ending legal action that had been going for a couple of years... so the earnings from regular business has improved from 5c in the first half, to about 7c in the 2nd half (which is consistent with my observations on the ground - first half was very flat, utilisation rate was very low across most locations, but 2nd half has been very good - so don't expect that rate of growth to continue, there are some abnormalities in there... all things being equal I would estimate FY13 earnings to be 13-14c at this point).

So a little info on what's been happening in the last 4 or so years...

Coming up to the GFC, Oakton was well and truly in growth mode - they took over Acumen Alliance in 2006 that effectively became an instant Canberra office, giving us exposure to the Federal Government. The hiring policy was very aggressive - it was hire in advance, so if they found someone with a good skill set that we were a little thin in, they would hire right away and then try and find a project to place them in.

When the GFC hit, things obviously changed. There was quite a bit of debt on the books still from the Acumen takeover, so priority one was to repay that debt - that meant suspending dividends and putting all earnings into paying off the debt (which was achieved a couple of years ago - dividends have now been reinstated). The hiring policy also changed to hire when needed, i.e. when a project needed a skill set we didn't have, only then would they look to hire.

We are slowly starting to see some signs of growth again - we are still hiring as needed, but one reason the first half results were impacted was that even when the market was flat (and it was very flat), they held on to just about everyone - so each location would have had plenty of people sitting on the bench, getting paid, but earning no money... that decision obviously helped the 2nd half results where most of those people have been flat out on client projects. There is also the possibility of expanding into the Perth market - with a couple of projects starting there this year and the possibility of expanding that further.

Also during the past couple of years OKN has had a branding refresh and has replaced many of their core systems... so that time of pulling back and refocusing has been used quite well and I believe we are well placed to move forward from this point.

...so, fundamentally - going on an EPS of say 13c which should be a reasonably conservative estimate for the next two years (if we can get a few more projects off the ground in Perth and establish a small office over there and the market stays about the level during the 2nd half of FY12, then it could easily be higher than that), then a P/E of 10 - 12, gives a range of $1.30-$1.56, which is what my target range is for the next 12 months, and that should also include a dividend of about 10c per year... so yeah, I think the price does look very cheap at this point (and the buyers have started to show up now too).

Should be an interesting 12 months for OKN I reckon.

 

[robusta]

Thank you for that perspective Vader, I have been considering my OKN holding for a while now the business seems to be at a crossroads, they have restructured operations just waiting for the results to come.

The strategic focus on employee engagement makes me think there have been problems in this area in the past probably as a result of the hiring policy you alluded to. My fear was that OKN would be left with subpar talent and utilisation of employees.

I continue to hold with a view to buying more.

 

[Baelish]

Really appreciate the insight Vader. Don't hesitate to give us any more updates about the direction of the group.
I appreciate that it's not a good time for new government IT contracts in Victoria and the share price probably reflects this.

I'll be holding my stake for the long-term.

 

[robusta]

Results out today;

Revenue down 7%
NPAT down 10%
EPS down 10%
No Debt, a bit over $9 mil in cash.

The market seemed to like this!! Probably because the H2 FY2012 up 27% on the pcp. looks like the strategy may be gaining some traction.

Will hold and look toward the interim report in six months time, there may be some growth in this baby and a nice yield as well.

 

[Vader]

Results out today;

Revenue down 7%
NPAT down 10%
EPS down 10%
No Debt, a bit over $9 mil in cash.

The market seemed to like this!! Probably because the H2 FY2012 up 27% on the pcp. looks like the strategy may be gaining some traction.

Will hold and look toward the interim report in six months time, there may be some growth in this baby and a nice yield as well.

Yeah, the EPS was a bit lower than I thought it might be given what was previously reported etc. but the BIG improvement is in the statement of cashflows... gone from a position of 4.5m net debt a year ago to a position now of no debt and 9m cash on hand... receipts from customers up, payments to suppliers and employees down Indian office starting to show an increase in margins).

...add to that an increase in dividend.

...the only bit I don't really understand is why receipts from customers are up, employee costs are down - yet revenues from customers is down on the previous year (my financial statement forensics aren't good enough obviously).

Anyway, balance sheet is looking very healthy at the moment which is the main reason for the positive reaction I think - still showing a very nice dividend yield too, ex-dividend date is 27th August, will see what happens once that date passes.