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Cape Town – Companies that are at the forefront of cloud-based digital services of the information technology sector offer attractive investments, said William Ball, senior equity analyst at Sanlam Private Wealth.
He singled out a company, called Cognizant, which is listed on the Nasdaq.
The company is headquartered in New Jersey in the United States, and has a workforce of more than 240 000 people. Forbes is ranking Cognizant as one of the fastest-growing and best performing companies around the world, Bell said.
Sanlam Private Wealth favours Cognizant because it has an attractive growth proposition, which is driven by the shift to digital technologies. “We see the business as being well positioned over the longer term to capitalise on market trends, given its focus on ‘higher value’ and industry-specialised services,” Bell said.
“The adoption of cloud-based digital services and solutions are compelling growth opportunities for the company. In our opinion this is increasingly looking structural with a potentially long runway for growth in light, relatively modest penetration rates. We expect the company to profit from constant innovation and the needs of clients to invest in digital projects.”
In addition, Cognizant fosters strong client relationships, through a “two-in-a-box” model.
“This is where a senior leader manages the client relationship and another oversees service delivery from Asia,” Bell explains. “This model reduces IT budgets, overhaul IT operations and redeploy freed-up assets to more strategic initiatives that generate business value.”
Cognizant has also made a healthcare acquisition which Bell regards as an exciting opportunity. “This will enable the company to take advantage of the technological evolution within the global healthcare arena. It’s also well positioned to capture growth from the structural developments within financial services as companies develop their digital services.”
Bell said, Sanlam Private Wealth likes Cognizant’s “strong cash flow dynamics, limited capital expenditure requirements and management’s ability to generate high returns on capital”.
“We expect the attractive cash returns on invested capital to continue for the foreseeable future.”
Attractive valuation
Sanlam Private Wealth has used a “blend” of discounted cash flow method and enterprise value to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiple approach to arrive at an intrinsic valuation of US$67. “The shares are attractively valued, trading at -1 standard deviation from its long-term average on 16 times 2016 earnings,” Bell said.
