STM Group plc (LON:STM) was the topic of discussion when Nik Lysiuk, Analyst at finnCap caught up with DirectorsTalk.
Q. STM recently issued a trading update, what were they key points you noted in the update?
A. Unsurprisingly Covid-19 has been the reason behind the slowing of client wins in the flexible annuity and workplace pension offering, meaning we downgraded our estimates across each of the next three periods, since this slower take-up in new business is feeding through to a lower starting base in subsequent years.
Q. How does this impact your forecasts?
A. The fixed cost base is obviously great when the company grows as it allows gearing in the earnings, but when pressure starts to show, a hit to the top line feeds straight through to PBT. In this case we had to mark down 2020E PBT by £0.5m, or 18.7%, and £0.7m in 2021E, or 14.9%.
Q. In terms of fair value how do you see the company?
A. Given that hit to profitability, we also moved down our target price to 42p from 53p given the somewhat formulaic nature of what we believe to be fair value, which is based on peer group comparisons. Despite this near term negativity, we have a fundamental belief in the inherent opportunity for STM and not the current P/E multiple of around 5x is under pressure because of the near term difficulties. For long term investors however, the opportunity remains.
Q. How do you view the outlook for the company?
A. It’s all about execution. If STM Group can execute on what is a very real, clear opportunity for scale, organic and acquisitive expansion and product development in the pensions administration sector, then the fundamentally positive outlook will no doubt transpire to be true, delivering solid returns for shareholders. On the other hand, the environment is very difficult at present, so we would urge investors to be patient.
