Stock Updates: UXC Ltd and Azure Healthcare

We review our recommendations on UXC and Azure.

UXC Limited

The UXC announcement on Friday April 11 of a partner agreement with Apptio confirms the company is heading in the right direction with the expansion of its cloud-based portfolio of solutions.

Generally speaking, the reason cloud-based solutions are growing at such a rapid rate is because:

  • Without an effective cloud strategy, organisations risk getting caught up in continual hardware upgrades and different software versions.
  • It is less capital intensive as cloud computing is usually pay-as-you-go rather than involving an upfront investment in expensive hardware and infrastructure.
  • Improved document control and access to live information about the business.
  • Improves efficiency by quickly been able to meet business demands.
  • Increased security and ability for employees to work from anywhere.

Apptio is a provider of software-as-a-service (SaaS) applications – a suite of cloud-based applications providing IT leaders with the facts they need to make faster decisions, improved efficiency and the ability to track and calculate the return on investment (ROI) on IT spending.

Apptio identified, and capitalised on, a gap in the market. Previously there was a key business system for every other department apart from IT. It has been estimated that this new category could be a $US800 million global software market in FY14.

The blue-chip global customer base includes names such as RBS, Boeing, BP, Facebook, and Coca-Cola.

UXC is one of Apptio’s first partners in Australia and New Zealand. The partnership combines Apptio’s strength in cloud applications and UXC’s strength in end-to-end IT solutions in advisory, consulting, enterprise applications, infrastructure services and support.

For UXC, as well as the benefits from a deeper value proposition for its clients, it enables the company to leverage the capabilities within its advisory and consulting business.

UXC’s increasing number of cloud-based partners provides higher-growth opportunities, and a handy complement to the existing alignment with key Enterprise Resource Planning (ERP) market vendors of Microsoft, Oracle and SAP. ERP, in general terms, is business management software – usually a suite of integrated applications – that allows a company to store and manage data from every division of the business.

The company is on track for a much stronger second half, benefiting from three key acquisitions towards the end of 2013. The first half was also impacted by $4.4 million of cost over-runs on large projects. Significantly, these projects have finished and the company has learnt its lessons and is better placed for future large-scale projects.

Our view is that UXC is strategically placed to continue to win market share against larger IT service competitors. Recent acquisitions and partnerships have the company well aligned with new technology and service offerings that provide a greater ability to create value for customers.

A much needed lift in business confidence and government spending would be a key catalyst for growth. The cyclical slowdown in IT capital expenditure over the past few years has created underlying demand to replace old systems. There are early signs of better times ahead for UXC, such as the increasing backlog and frontlog of work.

The share price has declined from $1.05 to the current price of $0.84 since we first recommended the stock on February 5. There is however no change to our forecasts or positive view on the company.

We re-iterate our outperform recommendation, with a valuation of $1.20.

Azure Healthcare (AZV)

The share price of Azure Healthcare has corrected from a high of $0.36 to a low of $0.275 over the last one to two weeks. (Currently $0.30)

As a guess, the likely reasons for the sell-down include general market weakness and particularly the tech stock weakness in the US. On top of this it was reported yesterday that company software specialist Nathan Buzza will be departing Azure for another opportunity with a start-up software company.

Putting this noise to one side, it is earnings that drive the share price in the long term and in this regard I have high confidence that earnings forecasts will be met as a minimum, and most likely exceeded.

Buzza’s specialty is creative innovation, with a particular focus on software. He founded Commtech Wireless and sold it to Amcom Software in 2008. Azure’s software solution has been fully developed and the company is struggling to keep up with demand. Hence it would appear his work has been done, and he is looking for other challenges and opportunities to develop new software solutions.

Whilst there is no doubt his departure will be a hit to the management team, I believe that the company is well enough established to overcome the loss. CEO Robert Grey remains in charge, and I have high confidence in his ability to drive continued earnings and share price growth.

With Azure’s business in the software and healthcare industry, it would be easy to place the company in the basket of US tech-related stocks that are trading at a lofty premium to most valuation metrics. The reality is the stock is trading at a large discount to my $0.39 valuation, and on discounted P/E multiples – in comparison to the sector. In regards to earnings, the likely risk I currently see is upside. The company’s earnings guidance stated it would exceed industry revenue growth of 20%.

With 40% revenue growth achieved in the first half, and the company struggling to keep up with demand, a profit upgrade announced to the market prior to June 30 would not be a surprise. Whilst there is a first-half weighting to earnings due to the holiday slowdown period over January, the company has been increasing sales out of its new US facility. I don’t expect the first-half performance to be repeated, but I do believe there is a good chance it will be materially above managements prior expectations.

Hills (HIL) is an Australian-based company with a market cap of $430 million and a wide range of products and services in electronics, lifestyle, industrials and now healthcare. With the recent sale of its steel business, management made the strategic decision to enter the health market. The company recently announced the acquisition of Questec – an Australian-based smaller version of Azure.

We remain confident that Azure’s combined hardware/software healthcare offering is way ahead of the Hills new offering. Much of Azure’s growth is in the US; however in Australia our feedback suggests that the only way Hills is winning contracts is via discounting its tender prices.

The shift to becoming a successful software provider will continue to create shareholder value. The sales split is still only 75/25 hardware vs software, with the company aiming for a 50/50 split. This increasing percentage of software sales is the reason why huge margin growth was achieved in the first half result with 239% NPAT growth on revenue growth of 40%.

We maintain our BUY recommendation, with a $0.39 valuation and target price.

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