Derek Pain: Software supplier must cope with failure of customer

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The Independent Online

The failure of the New York futures brokerMF Global has impacted on an already struggling constituent of the no pain, no gain portfolio. A few weeks before the US group went belly-up, Patsystems warned shareholders they would have to be content with only a "modest profit" this year as sales of its derivativesoftware had suffered withdealers and others delaying – or reducing – their need for cutting edge technology.

Now the group has to contend with the US shock. Although it describes MF Global as an "important customer" the damage inflicted is, I believe, tolerable. The American brokerage provides around £3m of recurring revenue to Patsystems and owes some £300,000. Still, even a fleabite can be uncomfortable when you are under the weather.

Whether the collapse of MF Global, which started life a few centuries ago as a London sugar broker and used to be related to the Man Group hedge fund business, will create long term financial ripples – and present further worries to companies like Patsystems – remains to be seen.

A week before its troubles materialised, MF Global, it is reported, seemed a relatively solid and sound dealer. But dabbling in eurozone government debts has been its undoing.

The portfolio alighted on Patsystems more than two years ago, paying 24p a share. With the price at 11.5p, capitalising the company at £23.5m, there is a temptation to lock in the loss. But I have decided to hold fire for the time being.

If, as some suggest, this year's profits will be around £400,000 with £2.8m next year, the shares could rally. But the stockbroker Arbuthnot has cut its target price to a mere 14p and withdrawn its buy recommendation. I reckon my tip is well and truly underwater unless ION Trading decides the time is ripe to strike.

ION's interest was diluted to 27.9 per cent when earlier this year Patsystems embarked on a New York buy, bringing into its orbit equities and options software. It was a £17.6m cash and shares deal.

ION Trading, an Irish-based company said to be run from Italy, has displayed a keen interest in Patsystems for the past six years, seemingly content to enjoy a position below the 30 per cent level that triggers a takeover obligation. The two are not, strictly speaking, rivals. Patsystems is involved with derivatives whereas bonds are ION's software speciality.

Still, perhaps the slump in Patsystems shares will prompt the Irish-Italian group to embark on takeover action with a view to merging the derivative and bond operations.

The decline in Patsystems shares should not, I suppose, come as a complete surprise. In addition to the obvious impact of the profits warning they have the misfortune to be traded on the secondary market AIM, and there is little doubt the performance of many junior market constituents has been disappointing. The AIM index has under-scored both the FTSE all-share index and even the FTSE small-cap index.

Now to the fully listed constituents of the portfolio. G4S, the security giant, has sadly been forced to abandon predatory action. Investors rebelled against its planned £5.2bn acquisition of ISS, and it became clear it would not obtain the 75 per cent approval needed. The shares are still some way from their pre-bid level and are likely to remain forlorn for some time.

I have not seen any stockbroker comments on just how well Avation, the aircraft leasing group, will perform this year. But prospects are obviously promising. Last year it produced profits of around £5.6m.

That figure did not include any contribution from the three aircraft already leased to the Australian airline Skywest to operate on behalf of another airline. A fourth is due to be leased this year and four are scheduled for next year. All told up to 18 aircraft could be involved.

If all continues to go well, Avation's current year's pre-tax profit could approach £7m with, perhaps, more than £8m in the following year. The group has a progressive dividend policy and that can only enhance the shares.

They have risen from a 58p low to a peak of 120p since becoming fully listed, when the group climbed directly from the fringe Plus market. Current price is around 107p.

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