STW's mixed message an opportunity for investors

STW Communications Group couldn’t hold on to early gains after posting better than expected full year top-line growth but a slightly softer than expected net profit.

STW Communications Group (SGN) couldn’t hold on to early gains after posting better than expected full year top-line growth but a slightly softer than expected net profit.

The advertising and communications group delivered a 13.3% increase in group revenue to $395 million as net profit improved 12.5% to $49.5 million for the 12-months to end December.

Analysts polled on Bloomberg were expecting sales of $389 million and a bottom line of $50.5 million for 2013.

The stock initially rallied over 4% before losing momentum to trade flat at $1.47 at 11.14 am AEDT as investors digested the news and management’s outlook.

The results were solid given the challenging market conditions, but guidance was perhaps a little softer than what some were hoping. Management is guiding for around 5% net profit growth for the current year, excluding the impact of any potential acquisitions, when consensus had pencilled in over 8% growth to net income.

I was expecting a slightly stronger guidance and I think there is upside risk to management’s guidance as economic indicators point to growing consumer and business confidence. Advertising spend is also coming off a relatively low base and that could see the group post sales growth ahead of the 5% plus that analysts are predicting for the year.

Further, the stock is trading on undemanding multiples. On relatively subdued 2014 consensus expectations, the stock is on a price-earnings multiple of 11 times when global peers are hovering around 20 times and is on a relatively attractive gross up yield of over 8%.

The discount seems unjustified given that the group generates better operating margins and superior return on equity to its peers.

I have written about STW’s prospects in October last year and I reiterate my recommendation on the stock.

STW is part of the Uncapped 100 and the stock is up 9.3% over the last 12-months.

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