Megabuyte

Megabuyte morning round-up 28.03.08

The markets were perky again yesterday as the FTSE gained 1% to 5,718 and the Megabuyte Leaders Index ended up 0.2% to 845.9. However, weaker than expected revenues and negative comments on current trading from Oracle overnight are likely to weigh on sentiment this morning. The NASDAQ ended the day nearly 2% lower at 2,281.

Civica follows Northgate in bid to go private with 3i

The management team of Civica, which supplies software and services to the local authority and housing market has launch a 270p per share all share cash bid for the company backed by 3i. The bid represents a 34% premium to last night's closing price and values the company at £190m. The bidco has irrevocable undertakings 41.5% of Civica shareholders.

First thoughts: Stock market interest in Public Sector IT companies seems to be inversely proportional to that of private equity. Valuations for the PSIT sub-sector are amongst the lowest in the SCS sector and yet most of the suppliers offer stability and strong cash flow - attractive attributes for private equity. The parallels with Northgate are interesting. As well as being competitors in the PSIT space, both companies announced initial private equity interest a year before the eventual bid. In June last year, Civica revealed that it was talking to a private equity firm (widely rumoured to be Alchemy, the investor that took the company private) but the deal came to nothing as the debt markets tightened. Since then, Civica's share price has slipped from 275p to 200p which has clearly made private equity deal more attractive, even with the required premium.

The 270p take-out price values Civica on 12.7x current year earnings which is almost bang in line with the Megabuyte 50 Index of which it is a constituent. Given the state of the markets and Civica's fall from investor favour, this looks like a good deal for shareholders. On a wider note, with Northgate and Civica in the hands of deep pocketed private equity players, it will be interesting to see what happens to the three other listed PSIT players. On that point, it is also interesting to note that the statement specifically says that 3i will provide further capital for growth. Anite's public sector business is currently for sale and, we understand, is also doing the rounds of the private equity community. It's not beyond the bounds of reason that 3i might look to acquire one of the other large players. They have proved their appetite to do this kind of large scale roll up with Telecity, with has made them a great deal of money. In addition to Anite, targets could include IBS OpenSystems which has stumbled recently and IDOX, which is the only one of the quoted players that seems to have any momentum at present. On thing seems certain, more change of ownership in PSIT looks like a certainty.

Megabuyte morning round-up 27.02.08

Tuesday was a steady day in the market but significant in that the FTSE closed above 6,000 - the index advanced 1.5% to end the day at 6,087. The Megabuyte Leaders Index was up 0.6% to 943.0 helped by a 3.5% gain in Logica shares ahead of results this morning. Of the stocks we reported on yesterday, only Craneware saw an increase in its price; 4% up to 153p. We met the management of Craneware for the first time at the analyst meeting yesterday and were impressed with what they have achieved in a relatively short space of time. We were left with the impression that, with several new products coming to market in the current year, the next 12-18 months will determine whether Craneware ends up as a profitable but small player or whether it has the potential to be a substantially larger company.

RCG slipped 7% to 82p on its results announcement whilst SDL eased 3% to 275p. We also attended the SDL analyst meeting having not seen the company for several years. The management's clarity of vision has not waned over the years and the execution so far has been faultless. We need to do some further work to understand the changes going on in the content management space. It seems that, as the Internet becomes ever more central to the customer proposition of so many companies, the worlds of content management and document management are coming closer together. Whenever there are fundamental shifts in customer requirements in this way, there are winners and loses in the vendor community, so it will be interesting to see which vendors thrive in the next period and which ones wither.

In-line results from Logica, but no word on restructuring until May

We've only had a chance to skim full year results from Logica this morning but, whilst in line with expectations, they look pretty lacklustre. Group revenues grew 3% to £3.1bn and adjusted EBIT was up a shade to £107m. The outlook statement notes caution in some areas of the customer base but a generally robust demand environment. Whilst there are several areas requiring focus from the new CEO, not least the lack of critical mass in its offshore capability, these results confirmed that the UK business remains a serious issue. UK revenues were 8% lower in 2007 to £663m and operating profits more than halved to £30.6m. Some will be disappointed that new CEO Andy Green has said that the conclusions of his review of the business will not be communicated until May.

Civica in line at AGM

In its AGM statement, Public Sector IT provider  Civica has said that trading is in line with expectations. The statement also notes that the company will be putting in increased investment into the Education market.

IBS warning is another stepping stone to consolidation

Shares in software vendor to local authorities and housing associations, IBS OpenSystems have slumped 25% to 125p (an all time low) following a negative trading update this morning. Interestingly, contrary to our earlier prediction, shares in Civica, Anite and Idox are either up or unchanged. In a period end trading update issued this morning, IBS said that revenues and profits for the year to December would be modestly below expectations and that the market outlook for 2008 is 'tightening'. As a result of the statement, brokers have trimmed their estimates by around 5% this year and 10% for 2008.

We had a conversation with the management team earlier today and the tone of the conversation was very much that the market was still solid enough, just that local authorities were tightening their belts somewhat, especially in revenue and benefits where there were only two significant tenders in 2007. Interestingly, Northgate CEO Chris Stone was bullish about the prospects for revenue and benefits systems at the Northgate interims analyst briefing in December. Stone's bullishness stemmed from the belief that many revs and bens systems were reaching the end of their useful life and that this would kick off a replacement cycle over the next few years. The newly appointed CEO of IBS, Richard Smith said to us that, whilst they are seeing dissatisfaction with some current systems out there, this is yet to translate into RFPs. On the housing association side of the business, trading still seems to be good for IBS as the trend to housing association mergers or shared service centres drives investment in new systems.

Our View

Whilst this statement is disappointing, given the overall focus on government budgetary tightening, it is not surprising that local authority spending on technology is moderating. IBS remains a solid, focused company with a strong market position and attractive financial dynamics. Because of these attractive qualities and because it has long been seen as a potential bid target, IBS has traditionally traded on a premium to its peers. Perhaps then the weakness in the shares today is merely an acknowledgement by the investment community that, whilst it may be a storng company, it is still subject to the same market pressures as other companies in the sub sector. Certainly, after today's price move, the shares now trade on a single figure 2008 PE, which is in line with the peer group.

After a long period of stalemate in the ongoing consolidation amongst public sector IT vendors, Anite putting a 'for sale' sign up over its Public Sector business before Christmas and the KKR bid for Northgate have heighten speculation that we are about to see another wave of consolidation in the public sector IT space. In our view, the share price move today from IBS can only serve to fuel this speculation further.

Civica confounds its doubters

Update (05.12.07): Apparently, Civica doesn't confound its doubters after all. We understand that the there might have been some misunderstanding about what was and what wasn't included in the adjusted profit umber in the results yesterday. We're not sure of the details, but the outcome seems to have been a round of downgrades of around 10% to 2008 estimates. Hence the further share price weakness.

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Full year results from public sector software and IT service supplier Civica showed good progress in the software, consulting and managed services businesses. Group revenues were only up a shade to £126.9m but underneath this number there was a strong performance from the core business which was masked by a decline in revenues from the lower margin third party software business. Software revenues were up 10% to £23.6m, consulting revenues increased 23% to £32.3m whilst turnover from managed services jumped 40% £36.3m. On the flip side, revenues from the third party software sales fell from £51.4m to £34.6m and contribution dropped by around £0.6m to £2.7m. As a consequence of the shift in revenue mix, operating margins increased significantly from 14.8% to 17.0% which resulted in a 21% improvement in operating profits to £21.6m. Cash flow was again strong with net cash of £6.0m generated in the year - and net debt at the year end was £31.9m. The order book was up by 6% at the year end and management reports a good start to the current year.

Our View

Civica is a bit of a mystery. The company continues to produce strong results and yet the shares continue to languish near a five year low. Even after a solid set of numbers today, the shares have only managed a modest 1% rise. Even in the context of a difficult market, a single figure PE looks harsh and we can't help thinking that at this valuation, the company may once again find itself subject to interest either from private equity or the trade.

UK Technews - Friday round-up 30.11.07

This week's movers

It's been a very busy week with lots of results and other trading news. Overall, our universe registered a modest 1.1% gain on the week, but is still down over 10% in November. You can download our weekly share price round up here. The most significant results of the week came from Sage and, despite comments from the management about the need for investment in the US, the market was happy with the results and the shares are up 2.6% on the week to 214p. Billing software vendor Intec Telecom Systems produced a solid set of results which showed good progress from tough year in 2006. The shares were initially weak, but responded well to director share purchases and are up over 5% on the week so far. You can read our analysis of the results here.

On the trading update front, Axon reassured the market this morning after the shares have come back by a third in the last couple of months. However, the trading update was accompanied with the news that founder Mark Hunter is to step down at the end of the year and the shares have dipped further this morning. We were able to have a chat to Mark this morning and you can read our thoughts here.

At the smaller end of the market, GB Group, Portrait Software, Iomart, OMG and Pilat Media Global announced results. We had a first meeting with Iomart on the results but were left unimpressed - you can read our post here. Also on the trading front, Group NBT and Delcam both issued trading updates yesterday but with very different messages. At its AGM, Group NBT reported that its year had started well and that it is confident for this year's results. Delcam, by contrast, said that due to the continuing weakness of the US$ and weakness in the Thai and Korean markets, results would be below expectations. The Korean market issues were put down to economic slowdown - we hadn't heard of any slowdown in Korea, but if there is one, perhaps there may be some read across to Aveva for whom the Korean market is important. Delcam shares were the worst performer of the week showing a 16% decline to 250p.

It seemed likely that the general share price weakness would bring trade buyers into the sector and so it is with Vega Group which announced a recommended cash offer at 280p per share from Italian aerospace group Finmeccanica. Unsurprisingly the shares are the best performer this week and you can read our thoughts on the bid here and here.

Lastly, it was also the annual TechMARK dinner this week which was eventful as ever. First of all many congratulations to all of the winners, especially Jonathan Imlah of Altium Securities for winning TechMARK analyst of the year - long overdue. We can't let comment on the evening pass without noting the smoking/urinating incident - we'll let the Telegraph City diary tell the story here. The individual involved - we'll call him Mr S - was very lucky not to get mentioned as we're sure that his (very conservative) employer would have been less than impressed.

What's on next week

With the exception of a couple of stragglers (e.g. Northgate IS on Monday 10th), next week will see the last results before Christmas and its going to be a busy week. Tuesday seems to be the busiest day with results from Civica, Innovation Group and Redknee Solutions. For us, Civica is the one to watch next week - the shares are trading at a five year low and yet the company confirmed that trading was in line as recently as August. Civica is trading on 8x this year's numbers dropping to 7x next year which tells us either that there's a profit warning coming or the shares are going bounce on the results. Insurance software vendor SSP is reporting on Wednesday - we had our first exposure to the company this week via a meeting with Executive Chairman David Rasche and were impressed with what we heard. Lastly Micro Focus is reporting on Thursday.

Civica reassures the market

Public sector software and services group Civica has this morning announced a pre-close trading update for its year ended September. The statement notes that profits and cash flow generation will be in line with expectations. However, there is no word on revenue growth which is significant given that underlying organic growth slowed to just 4% in H1. To underline the point, the statement comments that the continued shift towards owned products has resulted in a further increase in operating margin. Order intake seems to have been satisfactory with 80 new contracts signed in the year and international expansion continues to make progress. Lastly, the integration of recently acquired VT Software continues and the costs of this, combined with costs associated with the aborted bid will be taken as a £2.5m exceptional in the year.

Our View

Civica shares have been under pressure since a private equity bid approach came to nothing in early August and are trading near their three year low. The shares trade on just over 10x current year EPS although this is flattered by a low tax charge and a geared balance sheet (£35.6m net debt at the end of H1). The shares have opened up 2% to 207p but this only recovers yesterday's losses. Whilst it is encouraging that profits are in line, we feel that it may have needed a slightly more positive statement to wake the shares from their slumber.

Looking for read across to the other public sector IT providers, there is not a huge amount to take away from this statement either way. However, there will be plenty of news on the public sector IT market coming up over the next few weeks with trading updates and/or results from Anite, Northgate, Idox, Vega and Detica.

UK Technews 13.9.07

First a quick round up of yesterday's movers. Parity closed up 6% to 86.5p on the back of strong interim results and Civica was also strong again - up 8% to 216p to add to gains from Tuesday. Civica shares have been under pressure since it announced that private equity interest in the company had terminated, but clearly someone out there now thinks it's got too cheap. System C Healthcare shares also perked up on results to end the day up 3% to 31p. After a dreadful run in the shares, Vanco now seems to be finding some friends and closed up 6.4% to 266p. On the negative side, Vega shares dipped 5% to 215p as CEO Phil Cartmell sold a short 100,000 shares out of the LTIP - lunch is on you Phil. Also down on the day were Xaar shares - 4% lower at 210p on the back of lacklustre interims.

Turning to this morning - it's difficult to know where to start - results from Coda, Indigovision (shares up 6%), and DRS Data (shares up 8%) and trading updates from Datatec, Xansa and Netservices. Also, Morse has announced a small acquisition and Blinkx has announced a partnership with Utarget. Coda has announced interim revenue and profits up just under 10% and the results are accompanied by an upbeat trading statement. We will be speaking to CEO Graham Steinsberg later today. Coda shares have opened unchanged at 187p.

A trading update from acquisitive ICT services company Datatec has revealed some problems in the US side of recently acquired Logicalis where demand in H1 has been weak. The statement notes that prompt action has been taken that will results in profit recovery in H2 but the market is not so sure and the shares have opened down nearly 6% to 261p. There's a conference call at 9.00am so we will find out more then.

Lastly IT services group Morse has acquired Xayce, a small consulting firm in financial services and public sector for £3.6m in cash and shares with a maximum £2.5m earn-out. The company was formed nearly 10 years ago by a group of ex-Accenture consultants and generated revenues of £4.0m for the year ro March 07. Morse shares have opened down a shade to 95p.