What happened? Shares in SMS Management & Technology Limited (ASX: SMX) have surged an incredible 37.8% over the last month to a new 2-year high of $4.96. For perspective, the last time SMS's share price was close to $5 was back in mid-2013 in the middle of a series of poor profit results which resulted in the share price plunging to a low of $3.21 after peaking at over $7.15 in 2010.
The company is an IT software and service provider servicing a broad range of industries in Australia. SMS offers a mix of role-based (IT services [the cloud], systems integration, consulting, customer relationship management) and outcome-based (business performance improvement, application development and operational change) services to companies in the financial, communication and technology, and transport sectors.
So What? SMS' full-year report was well received by investors and analysts as they believe the tide may finally be turning for the Australian IT services industry. The industry, which is dominated by mid-cap ASX-listed companies like SMS, UXC Limited (ASX: UXC) and Technology One Limited (ASX: TNE), has struggled as customers have put off IT spending due to weak revenue growth.
My colleague Brendan Lau reported at the time that "it wasn't so much the 34% surge in net profit to $17 million for the year ended June 30, 2015 that is exciting investors", rather it was "the 200 basis point (two percentage point) increase in earnings before interest, depreciation and amortisation (EBITDA) margin for its core consulting division to 14.8% in 2014-15 compared with the previous financial year."
Now What? In my very first article for the Motley Fool back in 2013 I wrote about how analysts believed that a meaningful revival in the IT services and infrastructure industry was just around the corner… so if you're going to buy, go in with your eyes wide open.
The 2014-15 result finally breaks a two-year downtrend in the company's earnings and has seen analysts upgrade their 6% net profit growth assumption for the current financial year to nearly 16%!
Analysts expect the 2016 financial year to return around 32 cents earnings per share and a dividend of nearly 21 cents implying a price to earnings ratio of 15.5 and dividend yield of 4.2% fully franked. SMS remains cheaper than its rivals, however, there remain major risks in its business model which appears ripe for disruption!
