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This out-of-favour tech stock is making a big comeback today

The share price of Empired Ltd (ASX: EPD) has rocketed higher this morning after wallowing near one-year lows since the start of 2018.

Shares in the IT services group surged 11.1% to 50 cents in early trade and may have more room to climb as its half-year profit results, which were released today, could trigger a re-rating in the stock.

That would be welcomed news for investors given the recent canning of some high-profile tech companies such as Big Un Ltd (ASX: BIG) and GetSwift Ltd (ASX: GSW).

Empired turned in a 14% uplift in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $7.3 million for the six months to end December 2017 and said that EBITDA growth will be “significantly stronger” in the second half vs. the first half.

Earnings was at the top end of management’s guidance as total revenue inched up 2% to $85 million, although management was quick to point out that if its troubled Wellington operations were excluded, revenue would have increased by 10%.

That’s a bit of selective reporting if you asked me, but the protracted New Zealand federal election was the key reason behind the stock’s sharp fall from grace late last year when management warned that its business was affected by the event.

This wasn’t unexpected as other ASX-listed IT services companies had complained about a material drop in government contracts during the tumultuous years of the Rudd-Gillard-Rudd government.

But Empired can breathe a little easier as things are returning to normality in New Zealand and the company is seeing good growth prospects across a number of geographies and core service lines, which will support its second half earnings.

In fact, management has even gone a step further and commented on its “outstanding outlook for FY19”.

Its share price performance now hinges on whether investors take those comments at face value as Empired’s challenge is not valuation but confidence.

The stock is trading at a ridiculously low FY19 consensus price-earnings multiple of just 8.4 times when the stock has been trading between a 14 times and 28 times P/E over the past five years, according to data from Reuters.

However, the estimates are based on only two analysts and will be heavily impacted by any forecast downgrades.

Further, Empired needs to deliver a very big second half if it is to meet consensus.

On the other hand, given how far behind the stock is lagging with its 8.7% gain over the past 12-months vs. the 26.8% jump in the S&P/ASX 200 Info Tech (Index:^AXIJ) (ASX:XIJ), Empired has lots of room to run if management can get the stars to align.

The strong run in the tech sector can be attributed to the likes of Nextdc Ltd (ASX: NXT) and WiseTech Global Ltd (ASX: WTC).

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Motley Fool contributor Brendon Lau owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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