KUALA LUMPUR: VADS Bhd offers a safe haven for investors with its high proportion of annuity sales and solid growth to boast, says OSK Investment Research.
The research house said Friday earnings visibility and certainty were key merits under the present uncertain economic environment.
“Its current order-book stands at over RM400mil (0.6 times FY08 sales), slightly more than half (55%) from the bread and butter managed network services (MNS) and the remainder from the contact centre/business process outsourcing (BPO) space,” it said.
OSK Research said with the provision of higher yielding value added services, earnings before interest, taxation, depreciation and amortisation (EBITDA) margins should continue to widen.
It said VADS’ MNS segment was self propagating and it expected earnings to pick up momentum over the next few quarters on progressive billings of few new MNS accounts clinched in the first quarter of 2008 (Q108).
“Pipelines remain healthy (more than RM100mil) due to the robust demand for bandwidth from enterprises. In any case, the same enterprises would be more receptive to the idea of outsourcing non-critical backroom functions to third party providers in further streamlining costs,” it said.
The research house said there was ample room for VADS to reward shareholders going by the high free cashflow (FCF) yields of 8%-9% for FY08/09, which were above the regular dividend yield of 5% based on the payout commitment of 40%-60% of net profit.
“With a current cash balance of RM105mil, every share is backed by 80 sen cash (57% of net tangible asset). Assuming an optimal net debt/equity target of 0.2 time (net cash currently), there is scope for additional RM1.05/share to be returned to shareholders,” it said.
On VADS’s strategy, it said the company was keen to venture into the US where there was a huge market for business process outsourcing (BPO) and it was in exploratory discussions with few multinational corporations.
OSK Research maintained its buy call on VADS at RM6.35 and a target price of RM8.50.