CIBC maintains sector outperformer12-18 mo. Price Target $3.50
SVC-TSX (4/6/11) $2.31
SVC reported an in-line quarter, with rev., op. margins and adj. EPS generally in line with expectations. While NTT Communications was the only >10% customer (39%), we believe newly introduced products will help sales moving forward with Telefonica and other wireless customers.
SVC reported better-than-expected Q1 rev. of $19.2MM (vs. our $18.8MM est., cons. $18.3MM). GM was lower at 70.7% (vs. our 74.6% est., cons. 73.2%) due to mix (more hardware) and a greater use of the reseller channels. Adj. EPS was -
.01 (vs. both our and consensus est. at -
.01).
For Q2, we expect rev. of $21.1MM (cons. $23MM), GM of 75.1% (cons. 73.1%), and flat adj. EPS (cons.
.01). Given the positive book-to-bill ratio, new customers added and favorable wireless sector trends, we believe our forecast is achievable and perhaps even conservative.
We reiterate our PT of $3.50 and SO rating. The shares are attractive as we expect SVC to generate material EPS leverage in the coming year. Our PT is based on a DCF ($3.45) & P/S of 3.5x F2012E plus cash (
.66). SVC currently trades at a P/S less cash of 2.5x F2011E vs. its peers at 3.1x.