SMS Management & Technology (SMX)

 SMX is an IT services and business management company.

It is the largest listed player on the ASX, with operations spanning Australia, Hong Kong, Singapore and Vietnam.

The company provides a broad range of consulting services including: business performance improvement, systems integration, application development, operational learning and change and customer relationship management.

The jewel in the crown is its diversified blue-chip client base of government departments and private sector clients, with 17 of the top 20 ASX listed companies counted as customers.

Its solid reputation for delivery, ensures a high rate of client retention.

This attribute has enabled the company to generate significant returns on invested capital, with return on equity averaging 25% over the past ten years.

The company is in excellent financial health with no net debt.

At present the company is experiencing challenging conditions with many of its clients either deferring their IT spend or looking to cut costs by going offshore to fulfill their requirements.

The company is taking advantage of what they believe to be the bottom of the cycle by making a number of earnings accretive acquisitions.

We review SMS Management & Technology following a recent trading update.

Trading remained weak during the third quarter, particularly in the key Victorian business and also the Australian Capital Territory, reflecting continued weak business conditions.

We still expect second-half fiscal 2014 earnings to improve on the first half, however, guidance for earnings before interest, tax, depreciation and amortization, or EBITDA, to increase 5% to 15% is disappointing.

The second half should benefit from a full six months' contribution from the Birchman acquisition, the absence of a number of one-off items, and initiatives aimed at lowering costs and addressing underperforming businesses.

Given this, we are surprised the second-half earnings increase is not greater.

While contracted sales increased from AUD 229 million to AUD 254 million for the first nine months, it appears businesses are still slow to start projects.

For more information about SMS Management & Technology (SMX) please contact us on 07 4771 4577.