A potential opportunity?
Last week we attended the 17th Annual Macquarie Conference in Sydney. One business firm that looked particularly appealing was CSG Limited (ASX: CSV). Unfortunately the stock is a bit on the small side for our funds but a brief analysis is an interesting exercise.
So what is CSG Limited? CSG provides office equipment finance for small business and governments as well as a large range of related services.
By grouping a range of different services under one banner, the firm not only provides their clients with goods and services, but also saves them time (being able to manage one provider rather than a dozen). Should a competitor attempt to steal a customer, they would have to offer a similar range of services at a lower price point (most will specialise in perhaps two or three products, but may not have the whole range). This leads to good margins being generated on a growing customer base with relatively low rates of churn – not a bad position to be in.
For investors, what should matter above most other profit measures is return on equity – reported for financial year 2014 as 25 per cent, in the firm’s half-year presentation. A cursory glance however at the financial year 2014 statement seems to show a different figure at approximately 5 per cent. Reportedly, the difference is that the presented 25 per cent does not include items such as goodwill ($162.9 million).
However, we had trouble replicating this calculation – we got approximately 15 per cent. It may be that other items are being removed and possibly Net Profit After Tax is adjusted for the amortisation of customer contracts.
CSG are expecting to up their contract win rate from 1 per half to 1 per quarter in the coming year hence there could be scope for operating leverage on the horizon.
Whilst the intention of this article is to flag CSG as a potential opportunity, we note that all investors should do their own research and consult with a licensed professional who can advise if the investment is suited to their needs. Montgomery Funds do not own shares in CSG
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Robert Summers
:
ROE is an important measure, but I always like to see reported profits backed up by cashflow (both from balance sheet calculations and OCF), and I’m only seeing cash outflows here. 2014 NPAT was all accruals, and that’s a red flag for me, pass thanks.
Guy Davis
:
Hi Scott, an ROE of 15% seems solid, however I saw that the earnings and ROE have fluctuated wildly over the last decade which makes me doubt the competitive advantage and wonder how much confidence can be had in there future ability to predict the number of new contracts. Interestingly one of their major clients are governments which could leave them vulnerable under a range of scenarios.
I’m left feeling like all this work trying to find needles in haystacks is self-defeating and we would largely be better off waiting patiently for some no-brainer bargains, whenever the market throws them up again.
Roger Montgomery
:
Amazing the human tendency to want to scale 13 foot walls for a dollar instead of just waiting to pick the notes sitting in the gutter.
Guy Davis
:
At the moment a lot of people seem convinced that we’ll never see the notes in the gutter again.
Roger Montgomery
:
But you will. It’s as certain as the sun rising in the East.