Derek Pain: Dotcom survivor takes me beyond unlucky 13

No Pain, No Gain
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The Independent Online

The no pain, no gain portfolio has completed its second deal this month, adding Patsystems to its collection. Last week, when recruiting brewer Marston's, I said that those who chose to ignore the current climate would probably regret their inaction in a few years' time.

There is no doubt, taking the longer term view, that many shares are still in the bargain basement, despite the strength they have displayed. Even so, a large number of duds litter the stock market, which means investors must tread with the utmost caution.

In its 10-plus years of existence, the portfolio has endured a number of disasters. Myhome International, which once looked so promising, is a classic example of poor investment judgement. Still, it is pointless back-jobbing, dwelling on past misfortunes. Investment is a forward-looking exercise.

Perhaps I should also confess that I am a superstitious old soul and anxious to lift the number of constituents from "unlucky" 13 to 14 (although I actually believe a membership of 16 is the ideal strength). My latest recruit is a high tech group. I find it difficult to get my head round many of these sophisticated IT players, but I feel relaxed about introducing Patsystems, although quite highly rated, to the portfolio.

Perhaps it is rather an obscure company, yet it is 15 years old and, with its shares at 24.75p, is capitalised at £44.3m. It has survived the recession quite well and the shares are near the middle of their 30-month range.

Patsystems was founded by a not altogether inspiring combination of derivative traders and computer buffs. Its risk and trading software is now used by a variety of blue chip financial institutions around the globe.

And it seems to be finding new clients as its electronic systems become more widely known. Hopes are particularly high that the group will increase its emerging markets penetration after it recently scored in Brazil and Malaysia.

As a provider of sophisticated financial equipment, Patsystems has not been entirely immune from the financial turmoil that has devastated the world's economy in the past few years. But it has achieved yearly profits, producing £2.1m last year.

At this year's interim stage, it reported turnover up 14.8 per cent and pre-tax profits of £1.5m. For the year, City estimates stretch to £4m from sales of £21.5m. Next year, profits of £5.4m, with turnover at nearly £24m, are predicted. Many expect these forecasts will be upgraded as Patsystems, a dividend payer, attracts new customers. The group has losses that should keep its tax bill to around 10 per cent for some time.

The group has around £7m in the bank. The cash pile has prompted thoughts it could soon indulge in takeover action, and I believe it is looking around for possible victims. But an Irish group, ION Trading, has amassed a threatening near 25 per cent stake and must be regarded as a possible predator.

Patsystems has had an eventful stock market life. It is actually a survivor of the madcap dotcom boom, floating on the main market just a week or so after the internet euphoria reached its never-to-be forgotten climax. High tech shares were bubbling near their peak and Patsystems, then loss-making, was for a time valued at more than £200m. With its current capitalisation, the group, now AIM-traded, is an eye-catching example of how much investors' perceptions have changed.

Richard Last, Patsystems' chairman, is no stranger to the portfolio. He was chief executive of Lynx, a computer group that I recruited at 216.5p. Unfortunately it was not a profitable investment and the shares were eventually sold at 74.5p. Lynx was later taken over at 120p – I expect a more robust performance this time.

Meanwhile Hargreaves Services, the fuel and transport group that was recruited to the portfolio in February 2007, has indicated that year's profits – expected next month – will match City expectations. Analysts, it seems, are looking for around £28m against £17.9m last time.

Chief executive Gordon Banham has made it clear he is in an expansionary mood with the energy business his main target. The continued development of the Maltby Colliery in Yorkshire, one of the nation's last working deep coal mines, is on the agenda.

The group's shares have been a little subdued in the past year. They are around 490p against a high of 640p. The portfolio paid 417p.

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