The Investment Column: Software group iSoft can extend healthy growth story abroad

Robert Wiseman starts to curdle; Hold on to Redrow as it builds for the future
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And while that has cemented its reputation at home, it is also planning for significant growth abroad.

In May, we predicted a significant re-rating for iSoft, when the shares were at 379p. At the time, we thought the company's discount to the rest of the software sector was unjustified.

That re-rating duly came, with the shares hitting a high of 461p at the end of August - a 21.6 per cent increase from our buy recommendation. Since then, the wind has gone from iSoft's sails rather, the price slipping back to 404p. However, the recent weakness represents a decent buying opportunity and a trading statement published yesterday before its interim results reassured the market that things are on track and the summer's expectations will be met.

The company reminded the market yesterday that its revenue streams tend to be weighted toward the second half of the year as both continental European and UK health service spending decisions are clustered around the end of December and April, outside its first half.

The stock market will need some signs that these overseas forays are beginning to bear fruit by the time the company announces its full-year results next summer. Tim Whiston, the company's chief executive, said: "In this regard, I am pleased to confirm that we continue to make good progress in developing opportunities for incremental new revenue streams in both existing and new international markets."

Revenues were up 75.5 per cent in the year to the end of April, while pre-tax profits more than doubled from £17.6m to £44.5m. And it is right to have faith that the management team can keep this going. Yesterday it said that its interim trading was in line with market expectations and that the management remained confident for the full year.

The trading statement said: "As anticipated and consistent with previous years, the business continues to experience significant seasonality in trading, with revenues and operating cash flows in particular geared to the second half of the financial year."

The company recently appointed John Weston, the former chief executive of BAE Systems, as its new non-executive chairman, a move that provides additional strength and depth in the company's boardroom, another reason why investors can feel confident that the share price has further upward momentum.

Robert Wiseman starts to curdle

The prospects for Robert Wiseman Dairies, milk supplier to Tesco, are turning sour. Caught between the dairy farmers and the mighty supermarkets, the East Kilbride-based company is ill-equipped to deal with the rising costs of fuel and packaging that are eating into its already thin profit margins.

Interim figures yesterday showed a 13 per cent jump in the volume of milk coming out of Wiseman's five major dairies, as Tesco and J Sainsbury decided to take more milk from the company. Unfortunately, these giants of the grocery trade forced Wiseman to accept lower prices for the privilege, and pre-tax profits were down 22 per cent to £12.1m. Wiseman has managed to get its own suppliers to agree to a price cut, but investors should brace themselves for some messy negotiations if it tries to get another one in the new year.

The company is keeping its fingers crossed that an unprecedented 30 per cent leap last month in the cost of a resin used in its containers will be reversed. The cost of fuel used in transportation to and from the dairies will surely stay high, though, and Wiseman's new energy contracts are about to kick in, adding a further £1m to annual costs. Redundancies in Scotland (a downsizing resulting from a lost contract with Morrisons) and a new, better-located distribution centre will not be enough to keep margins up in the rest of the financial year and beyond.

Perhaps Tesco, facing a gathering bandwagon of criticism on its might, will agree to accept higher prices to help Wiseman out, but don't bet heavily on it.

We advised you to steer clear of Wiseman shares in March, when Morrisons was deliberating whether to drop the company as a supplier, and the shares slid when it finally did. Share buy-backs have pushed them back above that level, but Wiseman's margin squeeze, its lack of diversification from milk, and a dividend yield of just 3 per cent mean the stock looks past its best before date. Sell.

Hold on to Redrow as it builds for the future

No investor came to any harm by taking a profit, and we advised banking a 70 per cent-plus gain on Redrow when we last wrote on the housebuilder in March last year. The remainder of our investment is up a further 23 per cent since then.

But play-it-safe shareholders were at it again yesterday, selling the shares down 11p to 455p after a cautious-sounding statement from management at the company's annual meeting.

Redrow, in common with other builders, is having to offer incentives (throwing in extras, offering part-exchange deals, etc) to entice buyers and consumer confidence remains difficult to gauge. With house prices flatter, margins are declining, and the next six-month results will show profits below those of last year.

So Redrow will have some catching up to do in the second half but, despite the share price reaction, there is no sense yet that it will miss market forecasts for broadly flat profits for the year as a whole. It has already sold 60 per cent of the homes it expects for the year, and is still expanding its number of sites, to more than 120 by the spring.

Redrow has one of the strongest land banks in the industry and some of the more innovative approaches to building. In particular, its Debut brand looks well-positioned. These offer extra-cheap flats starting from as little as £55,000 and targeted specifically at the first-time buyer. Debut developments in Rugby and Chorley have sold quickly, and a third scheme at Castle Vale, Birmingham, is about to go on the market.

When the housebuilding industry finally proves it can weather a downturn without the carnage of the early Nineties, share prices will get their overdue re-rating and Redrow, as one of the sector's stars, is worth keeping for that.

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