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  • OTOC Limited Given Share Price Target Range Of $0.175 To $0.21 By Brisbane Broker 0 comments
    Nov 14, 2013 11:35 PM

    OTOC Limited given share price target range of $0.175 to $0.21 by Brisbane broker Morgans. Current price is $0.11.

    OTOC Limited (ASX: OTC) has enjoyed a number of successes in recent months with its OTOC Australia business securing an additional $16.2 million worth of new work for the Nauru Processing Centre.

    Its Whelans Australia business has also won $4.3 million in work from Rio Tinto's (ASX: RIO) and Landgate.

    Little wonder then that Brisbane-based stockbroker Morgans believes a share price of between $0.175 and $0.21 is more appropriate for the company.

    This compares with the current price of $0.115 and is based on a price earnings ratio of between 5-6x rather than the current PE of about 3.5x.

    The following is an extract from the report:

    OTC provides construction and turnkey camp/village installations, environmental, surveying, mapping, town planning, facilities, project delivery and specialist consulting services.

    OTOC Australia (EBITDA of A$6.5m in FY13) specialises in the installation of mine site and remote area infrastructure for government, mining and oil & gas projects.

    Whelans Australia (EBITDA of A$2.9m in FY13) specialises in surveying, town planning and aerial mapping and provides services to mining and infrastructure projects, construction, land subdivision and all aspects of development.

    Key takeaways

    - FY14 revenue is underpinned by committed infrastructure contracts with the Federal Government (Nauru) and Rio Tinto as well as work in its Whelans surveying business;
    - Balance sheet in reasonable shape - OTC is a low capital intensive business and its balance sheet offers the group opportunities for further expansion.
    - Nauru keeps offering up new opportunities - In May 2013, OTC won a A$29m contract for Stage 1 of the Nauru Processing facility. In Oct 13, OTC received a A$10.5m variation on its Nauru contract post a fire which destroyed a proportion of the camp.
    - Expanding margins in Whelans - Whelan's is a relatively stable business with a sticky client base.
    - OTC is building a recurring revenue stream. Currently, OTC generates around A$2 million to $3m of recurring revenue. The aim is to grow this division to cover overhead costs.

    First impressions

    Over the years, OTC (previously Emerson Stewart) has been transformed from solely a mining services business into a more diversified player which has government clients, offers telecommunication services, recurring revenue and leverage to WA residential development.

    In our view, due to OTC's market cap, its transformation has gone somewhat unnoticed by the broader market.

    Consequently, under the leadership of Adam Lamond we believe a likely PE rating could occur as the OTC story gains a broader following.

    We have assumed 2H13 OTOC Australian margins can be maintained and Whelans margins tick up fractionally.

    On our back of the envelope forecasts OTC is trading on a PE of 3.3x. If we tax adjust OTC's NPAT to take into account a full 30% tax rate (vs ~25% due to R&D tax credits) the PE increase to ~3.5x.

    We believe a PE of 5-6x seems more appropriate which would see OTC's share price rerate to A$0.175-0.21.

    In our view, there are a number of key catalysts which could drive a PE rerating towards its peers. These includes further contract wins on Nauru and demonstrating that margins can be expanded in its Whelans division.

    Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX "Small and Mid-cap" stocks with distribution in Australia, UK, North America and Hong Kong / China.

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