Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

Stock Of The Day - STW COMMUNICATIONS (BUY)

Quite recently, STW Communications Group (ASX:SGN) management has amended its debt covenants and is targeting to achieve 2x Net Debt/EBITDA by the end of next year, as compared to the earlier ratio of 2.5x Net Debt/EBITDA in December 2014.



New Covenant Definitions (Source: Company Reports)

The company announced a dividend payout ratio of 60% to 70% of earnings and intends to maintain its dividend reinvestment plan at the present discount of 2.5%. STW Communications intends to achieve an internal leverage ratio of 1.5 to 2 times (net debt/Statutory EBITDA). To achieve this, the firm intends not to make any new acquisitions, focus on organic growth, target fixed asset renewal at <80% of depreciation and emphasize on free cash flow and reduce working capital.



Dividend Payout Ratio (Source: Company Reports)

Although, the company’s revenues in 2014 posted a year over year increase of 10.1% to $442.9 million, EBITDA fell 5% year over year to $83.3 million. Consequently net profit declined to $45.6 million last year. Therefore STW had to cut its dividends to 6.8 cents per share in 2014, as compared to 8.6 cents per share in 2013. 


Recent Financial Performance (Source: Company Reports)

Operating Margins decreased to 19% in 2014, as compared to 22% in 2013. This decline is mainly due to Active Display Group acquisition, competitors’ pressures and loss making business units.  Meanwhile, to improve its operating margins SGN is focusing on direct margin businesses, structuring some bigger businesses to deliver scale efficiencies, developing underperforming units’ margins and improving procurement efficiencies. Moreover, the firm is also working to improve its cash conversion (operating cash flow/net profit after tax) from 70% in 2014 to over 100%.



Operating Margins and Cash Conversion (Source: Company Reports)

The firm’s Debt facilities rose last year to fund its ADG acquisition. STW has a core debt facilities of $270 million (excluding bank guarantees and leases). The debt of $70 million which is maturing in August 2016, has got a term out option to extend the maturity of the debt for an extra of 12 months to August 2017. Managements intends to implement receivables finance facility this year. 


Debt Facilities (Source: Company Reports)

The firm is also building a new leadership structure to build closer monitoring, in-depth engagement levels and improve leverage across the group. The leadership got access to the newly formed executive council (EXCO). EXCO member will have extensive knowledge and expertise in the respective firm’s discipline and offer guidance. Each company need to report to the EXCO member.

STW communications being a dominant player, accounting over 8.4% market share in the Australian advertising services market is repositioning itself to capture the changing market dynamics and withstand pressure from its competitors. The firm is also building its brand in South Asia, and one of its client in the region-Aleph, involved in digital product innovation and development has won the business of the year award.


STW’s market share (Source: Company Reports)

Moreover, STW communications is going on a cost cutting mode to achieve over $6.9 million annualized pre-tax savings. Total one-off costs for implementing the restructure are expected to be incurred in 2015, with the majority costs reflecting during first half of 2015. The company expects to start savings from second half of 2015, while benefit on the full pace from 2016. 


Cost Cutting inititaives (Source: Company Reports)

With regards to the new agreed covenant terms, the company intends to achieve a leverage covenant headroom of 18.6% under the new terms, as compared to 6% under the old terms. Also the Debt/ (Debt+Equity) covenant headroom improved to 23.8% under the new definition, as compared to 12.7% in the old definition. Net interest covenant headroom remained at 14.2%


How New Covenant Definitions work (Source: Company Reports)

We believe the recent announcement by STW communications as a positive move from the company in improving its debt covenants putting an end to investors’ concerns. Moreover, STW is well positioned to capture the market opportunity and with the revised strategy updates, the company is striving for organic revenue growth, benefit more from the earlier acquisitions, international expansions and improving operating efficiencies.

STW communications has been under pressure from quite some time with the stock falling over 55.4% in the last 52 weeks and delivering a negative year to date return of over 38%. This decline can partly be attributed to the disappointing 2014 results with the management admitting the poor performance, and investors’ concerns over raising capital to cover the firm’s debt covenants. In addition, ADG acquisition did not contribute much to the firm’s profit with the management confronting that the acquisition synergies has been slow due to changing advertising market dynamics.


SGN Daily Chart (Source - Thomson Reuters)

Despite the stock delivering a negative returns of approximately 13% in the last four weeks, STW communications has rallied over 12% in the last five days alone after the company made announcement of its new debt covenants. We believe that management’s continuous efforts would improve the stock performance in the future.

Based on the foregoing, we recommend a “BUY” to the company at the current price of $0.605.