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Are SMS Management & Technology Limited and UXC Lmited poised to deliver big returns?

Although SMS Management & Technology Limited’s (ASX: SMX) FY2014 has been disappointing (profit down 40%) it has reason to expect an improvement in trading conditions in 2015 and beyond. The ongoing deferral of significant IT capital expenditure by both business and government cannot last much longer; and SMX is likely to be an early beneficiary when the cycle inevitably turns.

The company is positively positioning itself for any uplift in activity and has made several add on acquisitions at the likely bottom of the down cycle. It has also established a major development centre in Vietnam with access to 1,600 variable cost consultants and captured more annuity-based revenue.

With two operating divisions, 1) Consulting – which mainly deals with financial institutions, government bodies, telecommunications, utilities and resources; 2) Contract labour – which is where SMX hires contractors on a semi-permanent basis and utilises them for projects. Due to over optimistic timing this division had a very poor 2014 achieving a record low utilisation rate.

Financially sound, SMX ($3.88) is set to reward patient investors in the medium term.

UXC Limited (ASX: UXC) is the largest locally owned IT services and solutions business and will also experience a lacklustre 2014 profit wise. UXC has the capabilities to provide an end to end ICT (information communications technology) solution for corporate and utility clients giving it a significant competitive advantage as the cycle turns. UXC is also deepening its range of cloud related services across the spectrum.

The company has firm relationships with the leading application vendors – Microsoft Dynamics, Oracle, SAP and ServiceNow. Following a couple of strategic acquisitions the North American market is providing opportunities for the group, and revenues here are expected to grow strongly.

UXC (85c) is due to report 2014 results on August 28 and an $18.5m net profit is anticipated – giving a 2014 PE ratio of 14.75 and a yield of 4.9%. With earnings expected to rebound in 2015, it should produce EPS 8c, PE ratio 10.5 and a 7.4% yield. In my view UXC is undervalued by the market.

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Motley Fool contributor Peter Andersen owns shares in SMS Management and UXC Limited