Company Overview– SAI Global Limited (SAI) is an applied information services company that helps organisations manage risk, achieve compliance and drive business improvement through business publishing, compliance, training and assurance. Products and services are based on a collection of more than 6,500 Australian standards in addition to foreign standards, International standards and other business improvement methodologies. SAI has transformed itself from a single distributor and assurance auditor of standards in Australia to a global provider of information services establishing operations across the UK, Europe and North America. The business is split across three divisions: 1 – Standards publishing and information databases which is engaged in the distribution of standards and information, 2 – Assurance services which is involved in auditing and inspections for standards conformity, 3 – Compliance Services, a new division focused on education, training and awareness services.

Analysis– SAI reported adjusted Net Profit after Tax (NPAT) of $22.3m down 3% on the previous corresponding period. In our view the pleasing aspect of the result was that margin compression in compliance was less than expected, highlighting the early stages of restructuring the division are tracking well. A fully franked interim dividend of 7cents per share was declared. The key highlight was of the result was property services, driven by the buoyant Australian housing market and new contracts. Importantly SAI reiterated FY14 guidance with the better 1H14 result reducing the 2H profit skew. We continue to view SAI as a compelling turnaround story with leverage to the robust domestic housing sector and a weaker AUD.

With regards to the information services there was stronger than expected result with EBITDA growing 21% to $31m on 12% revenue growth to $122m implying a 190 basis points margin expansion to 25.7%. On a constant currency basis revenue grew by 8.2% while Earnings before Interest & Tax (EBITDA) grew 5.6%. Standards and Technical information reported 7.6% EBITDA growth on 12.0% revenue growth. This reflected strong subscription sales in all regions with publications sales declining as per global trends. Property delivered 53.5% EBITDA growth on 12.1% revenue growth driven by the buoyant real estate market, the full impact of CBA and ANZ contracts and operational efficiencies.


Source – Company Reports

Compliance services delivered a weak result with a decline in EBITDA of 7% to $13m on 5% revenue growth to $47m. On a constant currency basis revenue declined 5.8%. Result reflects the adverse impacts of the poorly executed platform rationalization and migration process, partially offset by a weaker AUD. Importantly 3 of the largest clients were reportedly renewed on multi-year contracts at increased contract volumes.

Assurance services was a key disappointment with EBITDA down 1% to $14m on 11% revenue growth to $95m. Constant currency revenue growth was 4.4% with flat organic revenue. Although Asia and EMEA reported good volume growth, the Australian and American businesses saw slightly reduced revenue attributable to the phasing of audits. SAI expects this revenue to come through in 2H14.

SAI’s compliance services division is currently restructuring its IT platform. If this decision can deliver on management’s target of 35% EBITDA margin it would lift the valuation significantly. After five downgrades to guidance since February 2012 management reiterated FY14 guidance provided in October 2013 of revenue growth of 8-10% but lower EBITDA growth and flat NPAT.


SAI Daily Chart (Source – Thomson Reuters)

Price		Price % Change
Close:	3.85 (24-Feb-2014)	3M:	(2.70%)
52 Wk High:	4.60 (02-Oct-2013)	6M:	(8.31%)
52 Wk Low:	3.22 (26-Mar-2013)	1Y:	14.41%

 

Dividend
Yield	4.132231	FY
	3.42441	5yr Av

 
There was strong operating cash flow and capital expenditure was down compared to the previous corresponding period. Debt metrics remained comfortable at about 37% gearing slightly below SAI’s stated internal target gearing level of 40% - 50%. There was cash balance of $73m, debt of $278m and shareholder funds of $353m. In December 2013 the company extended the maturity of its borrowings. The earliest maturity of borrowings is now December 2015.

	2013	2012	2011	2010	2009
Profitability
Gross Margin	67.6%	64.7%	63.1%	59.6%	63.3%
EBITDA Margin	21.8%	22.1%	23.7%	19.5%	19.7%
Earning Power
Pretax ROA	(4.0%)	7.5%	9.9%	9.2%	7.9%
Pretax ROE	(8.9%)	16.2%	22.5%	22.8%	19.1%
Liquidity
Quick Ratio	1.41	1.24	1.26	1.00	0.76
Current Ratio	1.41	1.24	1.27	1.01	0.76
Leverage
Assets/Equity	2.31	2.15	2.13	2.48	2.45
Debt/Equity	0.80	0.69	0.68	0.85	0.80

 
The revenue growth is driven by a weaker Australian dollar, continued solid growth of subscription revenue in Standards and technical information business in the Information Services division, growth in the property business within the Information Services division due to the new business wins, an improved property market and a full years contribution from the ANZ and CBA contracts along with a return to trend growth of 5% to 7% in the Assurance division.

Property market activity is expected to remain buoyant during the second half. However it should be noted that the second half performance relative to the prior corresponding period will be much less pronounced  as the corresponding period last year included significant contributions from the ANZ and CBA contracts. Completing the restructure of Compliance and managing the development of the next generation learning platform should lead to further growth. Assurance growth is more skewed towards the second half than usual and an improved organic growth performance in the second half is expected which together with the impact of acquisitions and a continuing weaker Australian dollar is forecast to deliver full year double digit EBITDA growth. Rolling out the new back office platform in Assurance services should further help.

The company has grown the cost base and invested heavily in capital projects over recent years in part to address operational issues and globalise the business (compliance services), in part to accommodate major new business wins(property services) and in part to improve IT infrastructure generally across all company’s operations predominantly assurance services and corporate. As the company begins to move on from this phase of its development there will be increased focus on efficiency and productivity gains to improve margins and the operating leverage across the business.

We continue to view SAI as a compelling turnaround story with leverage to robust domestic housing sector and a weaker AUD. We will be putting a buy on the stock at the current price of $3.85.

---

Disclaimer
Kalkine provides general advice on securities. Kalkine does not provide advice that takes into account your, or anybody else’s investment objectives, financial situation or needs. We strongly suggest that you should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. Employees and/or associates of Kalkine Pty Ltd may hold one or more of the stocks reviewed on this website. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.