Derek Pain: Patsytems presents an attractive proposition

No Pain, No Gain
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The Independent Online

An Irish based company, said to be run from Italy, could be in a position to control the destiny of a constituent of the no pain, no gain portfolio. Patsystems, recruited last summer, and ION Trading operate in the rather esoteric worlds of computerised bond and derivative trading. Neither are dealers – they provide the sophisticated software.

Over the past five years or so ION has built a 29 per cent stake in Patsystems, often paying more than the share price. Yet contact between the two has been minimal. As part of their investment schedule David Webber, chief executive of Patsystems, and Martin Thorneycroft, its finance director, have been in touch with their biggest shareholder but the pesky question of that threatening shareholding has never been explored.

Does ION intend to bid or is it prepared to regard its interest as a "sound, long-term investment"? My guess is it will not be content forever to justify its holding on the grounds of dividend income and unrealised capital appreciation. It will eventually sell out or attempt to take full control.

The two are not strictly speaking direct rivals. ION is bond orientated; Patsystems' expertise embraces derivatives. So a deal would represent an expansion into a related territory for the Irish-based group.

ION, which is unquoted but has powerful private equity backing, has ventured along the takeover trail in recent years. One of its conquests was Rolfe & Nolan, a once-quoted business specialising in providing back office facilities for the futures and options markets.

If it should pursue Patsystems it could find itself bidding for a company based outside Britain; thinking about foreign tax shelters is not confined to behemoths like Diageo and Unilever. Little Patsystems, with a £43m capitalisation, has wondered about moving to, say, Hong Kong because, like its bigger contemporaries, it is concerned about this country's taxation pattern.

A survivor of the short-lived dotcom boom, Patsystems is prepared to make acquisitions. And it is in a position to expand with nearly £9m in the bank. Indeed it is looking around for suitable targets and I would not be surprised if it already has some in its sights.

The group is trading well. Adjusted pre-tax profits were up 7 per cent to £3.9m last year. The "true" pre-tax result more than doubled to £4.5m. Whatever figure you take it represents a remarkable performance for a business forced to endure the financial turmoil that followed the crash of Lehman Brothers.

Stockbroker Numis Securities expects this year's adjusted profits to emerge at £4.8m. The group has got off to a good 2010 start with chairman Richard Last talking about "a strong sales pipeline". The shares, as I write, are 24p, unchanged from the portfolio's buying price.

Another constituent, Hargreaves Services, the coal to transport group, has produced a sharp profits increase, despite a slump in turnover. Interim pre-tax profits emerged 20 per cent ahead at £14.7m. Yet revenue fell no less than 28.6 per cent to £211.6m. Lower commodity prices were responsible but, chief executive Gordon Banham says the group's business model insulates profits against such fluctuations.

Hargreaves encountered some problems on its coal mining side in the first half but it does not expect these difficulties to impact on second half profits.

The group, which is driving hard to increase its European operations, remains confident it will meet full-year expectations. The three stockbroker estimates I have seen point to an outturn ranging from £33.5m to near £34m. Last year it produced £26.2m.

My analytical threesome also seem convinced that further progress will be made. RBS Hoare Govett, which has been appointed joint stock broker with Brewin Dolphin, is shooting for £39.9m next year with Brewin on £40.5m. Panmure Gordon is looking for £39m.

Hargreaves, founded in 1994 with just 20 lorries, has enjoyed spectacular progress since it arrived on AIM at 243p in November 2005. By the time the portfolio descended on the shares 15 months later they were 417p. The price is now around 735p. With the arrival of heavyweight RBS and a capitalisation approaching £200m, Hargreaves could be contemplating a move from the junior AIM market to full listing.

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