Cash in on Misys roller-coaster

THE INVESTMENT COLUMN

Since 1991, when in keeping with many other companies it was blown off course by recession, Misys banking and insurance software house has been an impressive performer. Over the past five years, earnings have grown at a compound rate of 41 per cent and the dividend by 13 per cent a year.

That hasn't stopped investors enjoying a pretty rocky ride, however, with the shares falling from over 500p to 300p in 1994, before doubling again last year. Record profits for the half-year to November yesterday sent the stock 62p higher to 637p.

That sort of roller-coaster effect is misleading because Misys is a solid company, with a wide geographical spread and good recurring income, operating in fast-growing markets. Part of the volatility relates to the acquisition almost a year ago of ACT, which doubled the size of the company and set nervous investors fretting about possible, unspecified "black holes" in a business that had issued a string of profit warnings.

Pre-tax profits for the six months to November of pounds 19.2m (up from pounds 11.2m) showed those concerns to have been unfounded. ACT appears to have been well integrated and does not appear to have diluted one of Misys's big attractions, its ability to turn profits into cash. Borrowings in the year fell from pounds 12.4m to pounds 5.9m and should be eliminated by the year-end.

One of the problems with Misys, from the stock market perspective, is that there are few companies with which to compare it. Internally, it measures itself against mainly US competitors.

But with 55 per cent of profits coming from banking software packages and a further 30 per cent from insurance program business, Misys is exposed to some of the fastest-growing segments of a computer business that is itself undergoing the early stages of a massive revolution.

In banking, Misys has a strong position in emerging markets such as South-east Asia, eastern Europe and India, where the creation of banking infrastructure and deregulation is leading to enormous volumes of work. With 24 overseas offices, and 25 per cent of revenue already from emerging markets, Misys is better placed than its peers to benefit from these trends.

There are also enormous opportunities in the insurance business, where increasing competition from direct insurers is forcing the pace of automation (and so cost-cutting) at existing broker networks.

After better-than-expected half-year figures, the company looks well positioned to meet forecasts of between pounds 48m and pounds 52m pre-tax profits in the year to May. Even the bottom end of that range implies earnings per share of 42p, up 20 per cent on last year. At that rate of expansion a prospective price/earnings ratio of 15 looks a bit mean. Still some value to go for.

Tough times at Vibroplant

Vibroplant, the small-ticket plant hire group, is going through a bad patch at the moment. No sooner had it announced earlier this month that it was getting shot of its problem US division than it revealed the worse-than-expected effects of torrid trading on its UK business.

Yesterday, Vibroplant slipped what looked like a profits warning in with the circular announcing details of the pounds 68.8m sell-off of its American Hi-Lift division. The company said that since it announced interim profits 14 per cent higher at pounds 3.68m in November, trading conditions have continued to deteriorate in the UK and this will be reflected in results for the second half.

As a result, James Capel, the house broker, yesterday slashed pounds 1m off its forecast for the current year, leaving it at pounds 3.7m, and cut next year's from pounds 3.3m to pounds 2.6m. With the shares diving 11p to 86p yesterday, the price represents 16 times 1995/96 earnings and over 21 times those for 1996/97. These are heady multiples and only a yield of 5.8 per cent, assuming last year's 4p dividend is held, is providing much support for the shares, along with the 51 per cent stake held by the family of the chairman, Jeremy Pilkington.

The dividend prop looks firm at the moment, even if the payout will only just be covered by earnings this year. The US sale will leave it with pounds 20m of cash at a time when it needs to increase capital expenditure on its plant to compete with well-capitalised rivals and it should be able to take advantage of distressed sales of smaller groups to increase market share.

More worrying for investors is the company's distress at a time when market leaders Ashtead and Hewden-Stuart seem to be weathering the construction recession with much more aplomb. Times are undoubtedly lean, but Vibroplant seems to have been unnecessarily distracted by its problems in the US, while a switch to greater centralisation of its depots in the UK seems to have resulted in some loss of volume.

Its concentration on road building and civil engineering, which accounts for over half of turnover, is a serious weakness in the current environment of Government cut-backs and delays to the private finance initiative. Ashtead's two deals announced on Wednesday will reduce its dependence on these areas to below 40 per cent and will only increase Vibroplant's difficulties in the City. The Pilkington family may wish to rush for the exit through an agreed takeover, but that looks some way off yet. Unexciting.

ERF a dwarf in

land of giants

Things are not looking good for ERF, Britain's last remaining manufacturer of heavy trucks.

The group, based in Cheshire, has been slugging it out with manufacturing giants such as Volvo, Iveco-Ford and Mercedes and has managed to carve out a market share of between 9 and 10 per cent. But the strain is starting to show.

Yesterday the company issued an announcement about the re-structuring of its South African subsidiary but tagged a profits warning on the end. The shares, which stood at more than 300p last autumn, slumped 25 per cent to 182p.

ERF's continuing problem is its over-exposure to the UK market, which accounts for 80 per cent of its sales. That market has been extremely difficult and in December and January ERF had to put its workers on a three-day week due to a 40 per cent slump in orders.

ERF says that the order in-take has picked up a little and the export business is also improving, particularly in Africa and Europe where the group launched a new range at the Paris Show last autumn.

Production is up to four days a week but the British market for heavy trucks remains fragile so the prospect of a return to full production looks slim.

All this has had a dramatic effect on sales and profits. Analysts have slashed profit forecasts from pounds 2.6m for the current year to just pounds 1.6m.

In the past two years ERF has moved into France and Spain but the group needs to diversify more to spread its risk.

At least borrowings will come down after the company raised pounds 2.3m via the re-structure of its South African interests. ERF used to own 56 per cent of its South African subsidiary.

It is now selling part of that stake to another South African partner, Dorbyl. The group's bankers are backing the group and have extended their facilities to March 1997.

But even after yesterday's crash the shares trade on a forward rating of 22. ERF still looks a dwarf in a land of giants and the shares are best avoided.