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SMS Management & Technology: The IBM of Australia

March 20, 2012 | About:
SMS Management & Technology (ASX: SMX)(SMSUF) is a relatively small player in the global information technology (IT) sector, but it’s a powerhouse in Australian management consulting/software services.

With a market capitalization of about USD350 million, SMS Management & Technology resembles a forgotten crumb relative to IBM (IBM)’s $220 billion market cap and Accenture (ACN)’s $39 billion market cap.

But SMS Management & Technology has inherent strengths that stand tall. The company has established a fee-based business that relies on contractual relationships with major Australian companies. The company’s offerings don’t quite rise to the level of an “essential service,” but an impressive percentage of the IT outfit’s cash flow is locked-in under long-term contracts.

SMS Management & Technology disbursed AUD0.30 per share in fiscal 2011, up from AUD0.29 in fiscal 2010 and AUD0.25 in fiscal 2009 and 2008. That’s modest dividend growth, but the company’s skyrocketing stock price has generated a total return of almost 400 percent in U.S. dollar terms since early 2005. By comparison, shares of IBM are up about 125 percent over the same period, while Accenture’s stock has returned about 150 percent.

The last few years have been punctuated by worry about how the slowing economy will affect global IT spending. Over the past two years, shares of SMS Management & Technology have underperformed IBM’s stock by almost 40 percent.

Meanwhile, SMS Management & Technology boasts a five-year average sales growth rate of 14.3 percent, while the venerable Big Blue’s sales increased at an average annual rate of 2.1 percent. The Australian IT firm has reported sales growth rates of 7.4 percent in its fiscal year ended June 30, 2011, and 23.7 percent in its 2012 fiscal year.

SMS Management & Technology declared its first regular dividend in February 2005 and has never reduced this payout. As with most Australia-based companies, the company disburses an interim dividend and a final dividend to shareholders.

The company generates much of its revenue from financial institutions — three of Australia’s four largest banks are major customers — and other industries that rely heavily on IT.

Research firm Gartner (IT) estimates that global technology spending will grow by 3.7 percent in 2012, to USD3.8 trillion. The consultancy’s latest forecast represents a slight downgrade from its previous estimate that called for a 4.6 percent uptick in spending. Gartner attributed this revision to an economic “triple whammy” that threatens the IT sector’s growth prospects: faltering global economic growth, the EU’s ongoing sovereign-debt crisis and recent floods in Thailand.

But the ability to survive and thrive is not about size; it’s about talent and execution. SMS Management & Technology has proved its ability to manage the IT sector’s volatile earnings cycles. Recurring revenue continues to grow, and the company is winning larger contracts. The firm also has solid and sustaining federal government contracts.

SMS Management & Technology has been an active acquirer since 2004 and is taking advantage of its strong balance sheet to execute a new phase of its expansion plan. Management has made five deals since the financial crisis ended, including two businesses during the year ended June 30, 2011. SMS Management & Technology also initiated a program to enhance recruitment, retention and development of staff that bore immediate fruit, boosting the total number of full-time employees to 1,675, an increase of 22 percent.

Although talent is the lifeblood of SMS Management & Technology, bringing in new people combined with project deferrals reduced the company’s overall utilization rate for fiscal 2011 and the first six months of fiscal 2012. That being said, 85 percent of the top 20 companies on the Australian Securities Exchange use SMS Management & Technology’s services. Its international expansion model is based on “following Australian clients into Asia.”

The company has accomplished this through major contracts with Telstra Corp’s (ASX: TLS, OTC: TTRAF, ADR: TLSYY) international division in Hong Kong; by helping Australia & New Zealand Banking Group (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) execute its super-regional strategy; and via work with BHP Billiton’s (ASX: BHP, NYSE: BHP) MinEx division in Singapore.

SMS Management & Technology makes no apologies for its conservative capital management and asset allocation strategies. The balance sheet is strong, with zero debt and cash of AUD24.88 million on hand. Management’s policy is to distribute 65 percent to 70 percent of net profit after taxes to shareholders in the form of dividends.

During calendar 2011, shares of SMS Management & Technology were down 32.1 percent—worse than the S&P/ASX 200 IT Index’s 22.7 percent loss — even though SMS managed to grow revenue at a pace that beat the industry average.

What I like about SMS Management & Technology is the company’s reliable, rising dividend and the potential for impressive capital gains.

About the author:

Elliott Gue
Investing Daily provides stock market advice and investment newsletters to help independent investors achieve a secure and rewarding financial future. The site’s coverage focuses on finding the most profitable emerging trends in the investment universe to bring investors pragmatic and in-depth coverage of the names that are taking advantage of these opportunities.

Visit Elliott Gue's Website


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