Should I buy more CPT Global Limited (ASX:CGO)?

CPT Global Limited (ASX: CGO) has drifted up in price a little since I first covered it in this article for the Motley Fool. However, I still think it is attractive at current prices, because it’s a turnaround that is in the process of playing out now. I’d call it ethically acceptable, but as always, I’m interested in your opinions.

Based on the first half of 2014, I expect the company will earn a profit of at least $3 million in FY 2014, putting it on a price to earnings ratio of around 10. This looks quite cheap to me, given that I believe there is ongoing and even growing demand for the company’s specific services: capacity planning, performance tuning and IT system testing. I’m also bearish on the Australian dollar in the long term, so I like the fact that the company’s revenues come increasingly from overseas.

The company was brought to my attention by one of the top 3 best investors I know who also happens to be an awesome individual. He has told me more than a few good buys and to be honest, I screwed myself out of thousands of dollars by not acting on his tips quick enough (I always do my own research before buying, but sometimes I’m simply too slow, and the market moves ahead of me). I also note that Pie Funds have bought shares in the company at around 70c (from memory)  and as regular readers will know, they are one of the very few investment funds that I actually pay attention to.

Anyway, to cut a long story short, I actually really like the particular areas of IT consulting CPT global is operating in. They appear to actually test, tune and improve the systems set up by other (usually larger) IT businesses. That makes sense to me, because if you’re looking for an incremental improvement, it’s often better to get a fresh set of eyes to look at the system. Management seems good enough, although it’s only once you’re watching closely can you really make a judgment about management (and I’m on holidays). They didn’t have immediate success expanding overseas and the Australian business is probably shrinking, but it seems likely the expansion strategy is on the verge of paying off, with overseas revenues driving overall growth.

The main risk of investing in CPT Global is that the business is largely reliant on contracts, so it is quite difficult to predict future cash-flows – that’s why I generally prefer recurring revenue. At any rate, the company paid an interim dividend of 3c, fully franked, and if they repeat that dividend, then the company will yield over 7.5% fully franked, or a whopping 10.8% when you include franking credits. Personally, I’m thinking of putting in another order at about 75c, but I’d probably be happy enough to pay up to 80c, if I didn’t already own shares – I think that’s a decent price for this company keeping in mind a few lost contracts could ruin the whole buy thesis.

If the company does repeat the interim dividend, I’d be surprised if the current dividend mania doesn’t push the price up based on that alone. Obviously, that’s a short term angle. In the long term, I’m bullish about the need for performance tuning and testing.

The author owns shares in CPT Global Limited. Nothing on this blog is advice, ever, and may even be plain wrong. The purpose of this blog is to document my thoughts on different companies in an easily accessible way and to make connections with likeminded investors. Subscribers to the Free Newsletter get send research first, and have access to the Hidden Research.

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Comments

4 Responses to “Should I buy more CPT Global Limited (ASX:CGO)?”
  1. Ian says:

    I think that the main attraction for customers to CPT Global as that for a relatively low cost, if they can improve their existing “legacy” computer system and keep it running then that is a huge saving compared to upgrading to a whole new system.

    Yes CPT does rely on contracts so can have difficult to predict profits.

    One attraction is that they look to be growing overseas where margins also appear to be higher than in Australia.

    One concern for the very long term future for me is what the impact of cloud computing will be for CPT Global. It is a bit of an unknown for me at this point, however I feel that as there is migration to the cloud, companies will have in essentially outsourced their IT and in that case there is a possibility that may not have need to use CPT Global services.

    • Hi Ian, Thanks so much for your contribution.

      I agree cloud computing is an issue facing all in the IT industry, but at this stage I’m working under the assumption that cloud-based systems will still require performance tuning and testing etc. That is my understanding of it. Yes, it will impact the business anyway, but I’m not sure that it will be as negative for CPT as it has been for some of the other IT consultants. In fact, I think it will have less of an impact. More research is required on this particular question, but that’s where I am at the moment.

  2. Jeff Banks says:

    How are your predictions looking now!!!

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