SMS Mgmt warns on profits

Starting with its 2014 AGM a year ago, when it reported a surge in new contracts, SMS Management & Technology seems to have been defying the negative winds in the IT Services industry. Eventually, with this year's final result on 19 Aug 15 (Sell – $4.08), we let our gloomy industry view overshadow the positive signs at a company level and downgraded the stock to Sell. We're pleased we did, as with the profit warning at today's AGM the tough conditions appear to have caught up with the company.

First-half earnings before interest, tax, depreciation and amortisation are expected to fall 15-20% from last year's $13.5m – putting it at about $10.8m–11.5m, which is roughly the underlying level back two years ago, before last year's surge.

Blame was placed on the 'winding down of several major projects which has impacted billable utilisation' as well as the company's organisational restructure, which 'has caused short-term issues for sales effectiveness'.

Apparently there are some 'very encouraging' long-term contract opportunities in the pipeline, but today's warning reinforces our negative view of the sector (which we should acknowledge has become more negative since our initial Buy recommendation in IT Services under a cloud on 16 May 14 (Buy – $3.25)).

SMS has fallen about 20% on today's warning and is now down 12% since we recommended selling on 19 Aug. That puts it on a multiple of about 14 times 2015 earnings per share, but it would require a strong second half to match that in 2016 and we'd need a much cheaper price to get interested again, so we're CEASING COVERAGE.