NTL's revenue growth has faltered in recent quarters. We expect growth to pick up in 2H09, even as NTL tries to address growth challenges. We reiterate Buy despite significant earnings downgrades as current valuations appear unduly pessimistic.
Growth momentum derailed by several factors
We estimate NTL's revenue growth for the last 12 months at 13% yoy (US$ terms), which compares poorly with the 41% growth reported in the previous 12 months. This was led by a sharp decline in the BFSI vertical, even as business in the non-focus verticals continued to shrink. While the BPO business faced client-specific issues, revenues from ROOM solutions remained subdued,ahead of the new version release. In addition, the restructuring at Adecco has placed a question mark on the JV's growth prospects. With many of NTL's key clients facing profitability pressures,we expect their ability to spend to remain constrained in FY09. We project 11.7% top-line growth for NTL in FY09, below our 25% average growth estimate for the Top 5 players.
Signs of life in 2H09; management trying to address growth issues
While overall growth expectations for FY09 remain subdued, we expect a meaningful recovery to start in 2H09. The new version release of ROOM solutions, scheduled for September 2008, should result in higher order bookings in 3Q09. Management has indicated that the scale-down in BPO and the exit from non-focus areas are largely complete. A seasonally strong 2H for the domestic business should also provide a tailwind. We believe NTL's investment in building non-linear and differentiated services offerings is a step in the right direction. However, given the current concentration of ADM services (we estimate 70-75% of revenues), we believe it could take longerthan management expects for these initiatives to achieve the required critical mass.
Current valuations appear unduly pessimistic to us - Buy
NTL's valuations have compressed to 2006 levels, when the top line was depressed due to the company's focus-vertical strategy. We believe current valuations, at 4.8x our FY09F EPS (5% below consensus), price in perpetually negative earnings growth, even at a WACC of 16.2%. As valuations and dividend yield look compelling on both an absolute and relative basis, we reiterate Buy despite our significant earnings downgrades. We move from a DCF to PE-based valuation methodology, in line with our sectoral shift. Our target price suggests 28.7% total return (including 5.6% dividend yield) from current levels. We expect investor interest to return in 2H09, given the likely recovery in growth prospects.
Growth momentum derailed by several factors
We estimate NTL's revenue growth for the last 12 months at 13% yoy (US$ terms), which compares poorly with the 41% growth reported in the previous 12 months. This was led by a sharp decline in the BFSI vertical, even as business in the non-focus verticals continued to shrink. While the BPO business faced client-specific issues, revenues from ROOM solutions remained subdued,ahead of the new version release. In addition, the restructuring at Adecco has placed a question mark on the JV's growth prospects. With many of NTL's key clients facing profitability pressures,we expect their ability to spend to remain constrained in FY09. We project 11.7% top-line growth for NTL in FY09, below our 25% average growth estimate for the Top 5 players.
Signs of life in 2H09; management trying to address growth issues
While overall growth expectations for FY09 remain subdued, we expect a meaningful recovery to start in 2H09. The new version release of ROOM solutions, scheduled for September 2008, should result in higher order bookings in 3Q09. Management has indicated that the scale-down in BPO and the exit from non-focus areas are largely complete. A seasonally strong 2H for the domestic business should also provide a tailwind. We believe NTL's investment in building non-linear and differentiated services offerings is a step in the right direction. However, given the current concentration of ADM services (we estimate 70-75% of revenues), we believe it could take longerthan management expects for these initiatives to achieve the required critical mass.
Current valuations appear unduly pessimistic to us - Buy
NTL's valuations have compressed to 2006 levels, when the top line was depressed due to the company's focus-vertical strategy. We believe current valuations, at 4.8x our FY09F EPS (5% below consensus), price in perpetually negative earnings growth, even at a WACC of 16.2%. As valuations and dividend yield look compelling on both an absolute and relative basis, we reiterate Buy despite our significant earnings downgrades. We move from a DCF to PE-based valuation methodology, in line with our sectoral shift. Our target price suggests 28.7% total return (including 5.6% dividend yield) from current levels. We expect investor interest to return in 2H09, given the likely recovery in growth prospects.
No comments:
Post a Comment