CMG's rating at a dizzying high

The Investment Column
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The Independent Online
CMG, the Anglo-Dutch computer services group, is spreading a little happiness, at least to its shareholders. For a start, around 30 per cent of the company is owned by its employees.

Lucky them. Since it floated in Holland and the UK at 290p a share at the end of 1995, the price has soared. After yesterday's rise to 1,477.5p, the group's shares stand on a prospective rating of 43 times earnings - pretty dizzying even for those acclimatised to the stratospheric valuations of IT stocks.

Is this rating justified? Only partly. The company has an impressive record of attracting and keeping staff, vital in an industry where chronic people shortages are the only real restraint on growth. CMG's 11 per cent staff turnover is half the industry average. And by requiring all staff to take chunky shareholdings in the company, CMG keeps wage inflation at just 10 per cent, while discouraging job-hopping to chase the best salaries.

CMG's size and strong presence in both the Netherlands and UK also means that can attract global clients. It is also positioned in the fastest- growing IT markets - finance, telecoms and information processing represent 60 per cent of turnover - where customers such as Deutsche Bank have deep pockets.

CMG thinks it can grow faster than an already soaring market. It is certainly justified in believing that demand for IT services will continue, even when the year 2000 and Euro crises, just a tenth of its work, have faded.

But it is hard to see how CMG can sustain current growth rates. Part of the 33 per cent leap in half-year profits to June was a result of a return to profit in Germany.

Those arguing that a weaker pound will prompt further profit upgrades are considering only CMG's UK shareholders. The profit rise in constant currency would have been 60 per cent in Dutch guilders.

Just as enthusiasm from CMG's Dutch shareholders has driven the group's share price, any weakening of the pound may prompt profit downgrades in Holland.

Ross Jobber at UBS forecasts full-year profits of pounds 34.8m. On its current rating, CMG will be hit hard if it fails to match expectations. High enough.