Wednesday, 25 March 2009

Maxima and Touchstone

Following on from yesterday’s post on listed software company valuations and private equity interest, I now turn to two more software houses that have grown rapidly through acquisition, but, following recent setbacks, have seen their share prices plummet (to a level where they have become acquisition targets themselves). Neither is heavily involved in the supply of software and services to the UK public sector, although both have completed projects for Government organisations.

Through my involvement with Microsoft, I have been a close follower of both Maxima and Touchstone who have sought to grow by acquisition of many smaller software companies over the past few years, primarily focussed on the supply of software and services from Microsoft’s Dynamics range, although both supply software and services based on other supplier’s accounting systems and infrastructure products.

Both companies have issued profit warnings this month – Touchstone’s was expected, as its share price was already down 90% since its peak in 2007, and only moved down a bit – whilst Maxima’s was a bit of a surprise which saw its share price plunge to under 60p (down from a peak of 330p in 2007).

There is obvious concern about both companies’ performances deteriorating further, but looking at the revised expectations for the two companies:

Touchstone Maxima
Revenue c. £30M £50-56M
Forecast profit £0.3M £5M
Net debt None/minimal c. £15M?
Forecast eps 1.9p 19.1p
Current share price 18p 57p
Market Cap £2.3M £14M
(apologies for the poor formatting - I've yet to find out how to publish tables in Blogger format)

Looking at these revised estimates, Maxima seems to managing the downturn better than Touchstone – perhaps due to over 50% of its revenue being recurring, and therefore giving the company some time to cope with any contract terminations – whilst Touchstone seems more dependent on new sales, and these seem to have been much more difficult to make in the current financial environment.

The concern must be that Maxima’s downturn, partially protected by its contracted recurring revenue, might be just as great as Touchstone’s but the downwards curve is perhaps 6-12 months behind Touchstone’s. However, if their share price continues its downward movement in expectation of this, perhaps Maxima will decide on a “kitchen sink job” for reporting in the year to 31 May 2009, so as to make the future prospects more palatable.

As with all shares, the key is to call the bottom – I think (hope?) Touchstone’s was the 15p it touched last week – meanwhile I fear that Maxima’s lowest price is a few months away. However, both are acquisition targets as soon as the worst news is out of the way - and then I wouldn’t be surprised to see them both bought by their existing management once the credit markets have recovered.

Of course, a merger of the two would build a very strong player in the Microsoft Dynamics market, a market that I believe will grow very rapidly once the financial climate changes for the better......

P.S. I have been a short-term holder of Maxima shares twice over the past 2 years, both times exiting at the right time – which is good as I’ve been a long-term holder of Touchstone, with my profits on Maxima only just off-setting my losses on Touchstone. I still hold a small number of Touchstone shares.

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