RXP Services: Plenty of catalysts for a rerate
RXP has been an unpopular stock in an out-of-favour sector since it issued a surprise downgrade to earnings in December 2014. Since then, management has taken measures to de-risk the business, including increasing their contractor-to-employee mix and diversifying the client and project base.
After upgrading revenue guidance twice during the year, RXP reported a 61% increase in revenue to $127.1m, well ahead of its last guidance of $120m. The company achieved EBITDA margins of 14.3%, also above the range it guided.
We think management has been conservative in its outlook commentary for FY17, despite guidance of a further 10-15% growth in FY17 and FY18. If current utilisation and revenue-per-head metrics are maintained, RXP would significantly outperform its guidance without adding any further staff in FY17. And headcount has already grown since June 30!
Despite having stitched together some strong consecutive results, the market is only beginning to regain its belief in RXP. The company is trading on roughly 8x forward PER. Compare that to some of its peers trading on 14x despite growing at slower rates than RXP. With consensus for FY17 EPS at about 9.5cps (and likely upgrades to come), it is not hard to see this stock trading well above $1 per share.
In short, we think the growth in RXP’s business, upgrades to guidance and recovering valuations in the sector provide plenty of catalysts to close the valuation gap between RXP and its peers.
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