Broker snap: Cello to add more strings to its bow

Singer Capital Markets is initiating coverage of market research and consulting group Cello with a positive recommendation, saying that most of the company's earn out obligations from previous takeovers are behind it and the company is in a position again to expand through acquisition. The company's recent interim results demonstrated a return to positive growth despite extreme near term headwinds in the public sector, which Singer rates as "an exceptionally strong performance in this context."The broker thinks there are three main reasons to buy the shares. First is the aforementioned revenue growth. "Acquisitions are back on the agenda and will enhance growth. Cello's biggest business segment, Healthcare, is driving growth and international expansion offsetting the short term public sector headwind," the broker said. Cello chief executive Mark Scott told Sharecast earlier this week that the company "will buy again, probably in America" and that the plan is to double the size of Cello in the next two or three years.The second reason to buy cited by Singer is the company's strong positions in market research and healthcare. These are "scarce assets in a consolidating market."The broker also believes the shares are undervalued because the earnings are in the low part of the cycle. Compared to the valuation of its peers, the stock is cheap, and Singer thinks it is also undervalued on a sum of the parts (SOTP) basis and as a prospective takeover target. The stock trades on 6.6 times projected earnings per share for 2010 while the ratio of enterprise value to earnings before interest, tax, depreciation and amortisation is just 4.6. "This is clearly low," the broker argues. "If the share price does not recover then it is possible that Cello could become a target, given the scarcity value of its two operating units. We use a blended SOTP and peer based valuation to derive our 12 month target price, which we set at 71p, indicating over 50% upside," the broker concluded.