Megabuyte

Megabuyte morning round-up 15.02.08

Tech stocks outperformed the broader market yesterday although, in the US overnight, weak performance from Intel and other leading tech stocks lead the market down. The FTSE 100 closed unchanged at 5,879 whilst the Megabuyte Leaders Index jumped 2% to 937.1 lead by a 6% jump from Telecity and Aveva. Within the Megabuyte 50, Detica was strong ahead of this morning's IMS (see below) to gain 6% on the day to 240p - back to the level it was immediately after the interim results. In the  MB Fledgling, AT Communications (up 7% to 32.5p) and Iomart (up 11% to 41.5p) enjoyed a bounce but, with a further 5% decline, Netstore continued to reach new lows. We wouldn't necessarily expect the strong tech performance to carry on into today as the NASDAQ closed down 1.7% to 2,333.

Detica comfortable at IMS

Technology consulting group Detica has released a positive IMS this morning suggesting that current trading patterns have not changed materially since the interims in November. Revenues in the nine months to March increased 31%. The statement notes that business with the UK Government continues to perform well and that the US Government business is building on the progress made in H1, where it had a slow first quarter. The financial services business is still a game of two halves. Business in the retail banking sector is robust, driven by fraud and misconduct detection work whilst levels of activity in investment banking remain subdued, but in line with expectations. Overall, results for the year to March should be in line with expectations. After a poor performance in Q4, Detica shares have significantly outperformed the Megabuyte 50 since the start of the year and have started to regain some of their premium valuation. As long as the market isn't spooked by continuing weakness in the investment banking area (which really should come as no surprise), this statement could be a further step in restoring Detica's strong relative valuation.

Innovation Group upbeat, but will be H2 weighted

Insurance software and BPO player Innovation Group has said in a confidently worded IMS this morning that, although investments in sales and marketing will subdue H1 profitability, it is happy with full year expectations. Nobilas, which TIG acquired in October is said to be integrating well. You can read our original piece on the acquisition here. TIG's shares have modestly outperformed the Megabuyte 50 Index so far this year but still trade on a 10% discount to the peer group. Whilst the tone of TIG's statement this morning is positive, concerns that there may be increased risk in full year estimates may dampen TIG's share price performance until there is greater clarity on he out turn for the full year.

Nobilas deal looks like a winner for TIG

We have just come out of the TIG analyst meeting and were impressed with what we heard.  First, just a recap on the transaction itself. Subject to shareholder approval, TIG has agreed to acquire the assets of Nobilas, the motor claims management business of Akzo Nobel for a nominal €0.9m. Nobilas was founded in 2004 as a means of driving Akzo Nobel paint revenue through the car repair network. However, changes in management and the impending acquisition of ICI resulted in a change of strategic direction and Nobilas was put up for sale. Nobilas has grown rapidly since its inception and generated revenues of €11.4m in calendar 2006. However, the pan-European infrastructure created by Nobilas has meant that it generated losses of €13.3m in 2006 and a total of €27.7m in the three years to 2006. In addition to the consideration, TIG expects to incur some €8.0m in exceptional integration costs.

In a separate announcement, TIG said that results for the year to September 2007 will be in line with management expectations. Conversations with management suggest that, whilst PBT is in line, interest receivable was ahead of expectations implying that EBIT for the year may have been slightly behind. However, in the context of this acquisition and the positive outlook, we do not see this as a particularly significant point. Guidance has also been raised for 2008 although this will be offset by expected losses from Nobilas. We expect these losses from Nobilas to be around €2.0m which implies an underlying upgrade to 2008 estimates of around a 5%. The acquisition is expected to be earnings enhancing in fiscal 2009.

Our view

We had some concerns about the deal coming in to the meeting but these have been largely dealt with. Our concerns were really twofold.

• "Why would Akzo sell so cheaply?" An initial thought was - why would Akzo Nobel sell the business for practically nothing when it had invested so heavily in it. It seems that for Akzo Nobel, the key factor here was reputation and TIG was really the only safe home for the business. In our view, some of the most attractive acquisitions we see are those made when a large corporation decides to exit a business that is not material relative to its overall size. In these cases, the amount of money recieved for the business is often less important to the seller than a clean exit which is clearly of benefit to the acquirer. TIG's acquisition of Nobilas looks like it might be one of those instances.

• "Those losses look scary" Making a loss greater than revenue is quite an achievement but when one gets underneath the losses, they don't look so scary. Nobilas's underling losses in 2006 before non-recurring corporate costs were €13.3m. An expected €2.0m loss in fiscal 2008, implies a profit turnaround of €11.3m over just under two years. Whilst this still seems like a big number, revenues have grown strongly since 2006 and management expect that around two thirds of the profit turnaround will be delivered from revenue growth dropping through on a fixed cost base. This implies that TIG will need to generate around €4m in synergy savings - given the overlap in operations in the UK and Germany, this does not look too onerous. To get more comfort on this point, it is interesting to note that TIG's motor claims business and Nobilas are dealing with similar numbers of claims and yet TIG is making good margins.

In summary then, whilst there are clearly higher than average integration risks with a business like this, it does look like an excellent deal for TIG. With consensus 2008 profit and EPS estimates unchanged at £21.3m and 2.2p, the shares are trading on 15x fiscal 2008 earnings. This does not seem dramatically undervalued but, if it is able to get momentum back into earnings, we would argue that TIG should trade on at least a high teens multiple. However, over the years TIG has struggled somewhat to gain traction in the investment community. It has been a long road back from missed estimates in 2005 and, just as momentum seemed to be building last year, the company diluted EPS with the FNS fundraising. However, we do feel that the combination of the Nobilas acquisition and upgraded underlying estimates has the potential to help the shares break out of the narrow trading range in which they have been stuck for nearly two years.

UK Technews 11.10.07

The Alphameric roller coaster carried on yesterday as the company announced a bid approach - the shares ended up a massive 75% on the day to close at 25p. Endace held its early gains following its trading update to end the day 2% higher at 475p and Iomart, which has been under pressure enjoyed a bounce on the back of heavy trade and closed up 2% to 45p. Detica also had a good day adding 5% to 330p. On the negative side, Emblaze drifted down 6% after the directors share dealing that never was, AT Communications continues to drift after disappointing results (down 5% to 40p) and Portrait Software slipped over 5% to 17p.

Quite a bit of interesting news this morning. Insurance software and services supplier, The Innovation Group has issued a year end update saying that trading is ahead of expectations in local currency terms and in line with management expectations in reported terms. This is good news for TIG as there had been some concern in the market that H2 estimates, particularly in the software business, looked like a stretch. TIG has also announced the conditional acquisition of the Nobilas automotive claims business from Akzo Nobel. It's an interesting one as the business generated significant losses last year and TIG is only paying a nominal sum for the business. The Nobilas business generated revenues of £7.9m last year but losses of £9.2m although the statement notes that the losses resulted from investment in growth in the business. TIG is paying just £0.6m for Nobilas but one-off integration costs are put at £5.5m. Management anticipate that the acquisition will be dilutive for the year to Sept 2008 but enhancing thereafter. There is an analyst meeting this morning, so we will report back later.

Sage has issued a year end update saying that trading is in line with consensus estimates although, following a review of the North American business, the CEO and FD of that business are to be replaced. Lastly, GB Group has issued a positive half year trading update saying that revenues are broadly in line with market expectations but that losses will be significantly lower than expected. Whilst this is good news following on from a weaker trading update over the summer, the only slight disappointment is that growth in the DataAuthentication business remains relatively slow.