Small Caps | Oct 14 2015
-Potential for strong rebound
-Lack of CEO adds uncertainty
-Question over international expansion
By Eva Brocklehurst
Financial services software company, GBST Holdings ((GBT)), has issued a profit warning which has also exacerbated leadership uncertainty, given the impending retirement of the CEO, Stephen Lake.
The company has downgraded FY16 earnings forecasts substantially because of project delays in Europe and New Zealand while margins will be squeezed by a ramp up in R&D costs stemming from the international expansion, although this was foreshadowed.
Despite the oppressive news, several brokers remain of the view that the company has some supportive factors which stand it in good stead. Morgans believes robust technology and strong customer relationships provide potential for a strong rebound. A minor positive, noted by Deutsche Bank, is that the Australian capital markets business is expected to report an improved first half result following two years of earnings declines.
Deutsche Bank believes the downgrade, given it is primarily driven by contract deferrals into the second half and FY17, does not mean there are structural issues or market weakness. Rather, it is more a case of the sorts of risks frequently entailed in project work.
The broker also acknowledges some of the downgrade relates to continued international investment in capital markets, which may provide a strategic opportunity for a new CEO, although that division may also be reviewed under new leadership. Deutsche Bank retains a Buy rating while reducing its target to $5.30 from $5.80.
Morgans is concerned that the increase in international capital markets exposure is poorly timed and there is uncertainty without a permanent CEO. The board has decided not to appoint an internal candidate to replace Stephen Lake and this has left the company looking vulnerable, the broker believes, as this is a business where confidence is important.
Hence, the appointment of a new CEO with a track record is essential. Morgans also highlights that the company, being virtually rudderless, could move into the sights of one of the major global players in the industry.
A well regarded new CEO and a strategic update upon appointment could be a catalyst for the stock, Deutsche Bank agrees. The guidance implies FY16 earnings of $19-23m, with the mid point around 16% below Deutsche Bank's original forecasts. Guidance also suggests a material skew to the second half.
The deferrals mainly relate to an existing UK wealth management client deferring a new system implementation to the second half. Still, the company carries costs to support these project and so the impact on margins is material. Deutsche Bank forecasts margins compressing 400 basis points to 17.5% in FY16.
Morgans suspects the downgrade will pressure the company to slow its rate of investment in international capital markets and downgrades FY16 and FY17 estimates by 20% and 13% respectively. This reflects lower services revenue for wealth management, higher losses form international capital markets and a slower win rate for new contracts on the basis of current management uncertainty. Morgans retains an Add rating and lowers its target to $4.97 from $6.10.
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