Monday, 27 October 2008

Bottom fishing

With the FTSE 100 currently below 3,700, some 40% down on its peak earlier this year, is it time for some bottom fishing amongst software and services suppliers to the UK Public Sector?

Looking at the winners and losers to date, the big losers to date have been Logica (currently at 66p, down 60% on its peak earlier this year), Anite (currently at 30p, down 50%) and @UK (currently at 2.75p, down 68%). IDOX (9.25p, down 38%) and Mouchel (293, down 40%) seemed to have followed the market trend; whilst Capita (581p, down 33%) and Gladstone (22p, down only 15% as it is on the receiving end of a bid) seem to have beaten the market downturn.

Of course, some companies may have underlying problems before the potential impact of recession and credit crises (@UK, for instance, is down some 96% from its peak just after launch on AIM, and I believe its share price would have reached the current level without any external credit crunch or potential recession).

Logica appears to have been affected by the recent drops in valuations of off-shore IT companies that I believe are much more dependent on general commercial markets than Logica. But with a market cap of less than £1billion and more than £3billion in annual revenues, even allowing for c £1billion in debt, the share price drop seems overdone, particularly given the August management statement when their CEO, Andy Green said:

"We had a good first half...... Given the market environment, we remain alert to changes in customer sentiment but our first half performance gives us increased confidence that 2008 pro forma revenue growth will be closer to 4%, compared to our previous guidance of around 3%."

Tribal seems to be similarly affected – despite an up-beat half-year report, its market cap is down at £76m for a company turning over (with its new acquisition HELM) c £200m per annum (with net debt reported as only c £7m).

Meanwhile, Capita (long standing winner of Holway’s boring award) continues to receive a high rating (current p/e of c 25) on the back of years of monotonous annual growth in EPS, but has clearly seen its share price marked down in line with the general market.

Is it worth investing now? As ever, readers must do their own research, but my view is not yet. Fortunately I sold my holdings in Logica and Tribal near their peaks earlier this year – I will be looking to buy back in later, but not yet. Capita and Mouchel will continue to follow the market down, and will be possible purchases when the market settles.

But I believe that the downturn has yet to bottom out – my view is that the FTSE will need to hit 3,200 before it stabilises – and until then the very nature of having more sellers than buyers will hit the share prices of all listed companies, without necessarily reflecting their intrinsic value. I remain a holder of IDOX and Gladstone, both are solid, profitable companies that, I believe, will lose their independence via takeover in the next few months.

No comments: