FI Group worth buying on future dips

FI Group; SkyePharma; Bright Station
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The Independent Online

FI Group, the computer services firm, may be headed by women but there's nothing lady-like about this business.

FI Group, the computer services firm, may be headed by women but there's nothing lady-like about this business.

Last month, FI was caught bribing staff to identify colleagues whose work could be done cheaper by an Indian affiliate. Admittedly, the policy was abolished as soon as it came to the attention of the board, according to Hilary Cropper, the executive chairman.

So it should have come as no surprise that yesterday's interim results showed an aggressive performance from FI in the back end of last year, despite the slowdown in the IT industry. Like-for-like sales climbed 17 per cent, compared with about 7 per cent for the sector. But most City analysts were so worried about the health of the sector that they had expected FI to miss forecasts. The shares were languishing near a year-low before yesterday's 18.4 per cent uplift.

The results testified to the sense of FI's acquisition strategy. Sure, companies are delaying IT work as they investigate how to exploit the internet. By the same token, contracts are becoming larger and more complex. Were it not for the acquisitions of Druid and OSI, which brought capabilities in customer relationship management and consultancy, FI would be unable to satisfy today's customer demands.

Both purchases are responding well to the touch of Jo Connell, FI's managing director. Druid has returned to profit and is recruiting willy nilly; OSI is operating at full capacity. And the rest of FI performed well too. Outsourcing, 45 per cent of turnover, grew sales by 16 per cent.

Still, Ms Connell has a task on her hands in enticing chief executives into signing really big contracts, which have been in short supply over the last year. She is confident of success, citing first-half contract wins worth some £74m with Bank of Scotland, Barclays, and Centrica.

But the group also has its work cut out in sustaining the turnaround at Druid, which is gobbling working capital. UBS Warburg, the house broker, shaved its full-year forecast slightly, to £42m in pre-tax profits and 8.9p of earnings per share, following changes in FI's pension contributions.

Many investors will be sceptical of FI's claim that clients will still require its services in a recession. But with Lloyds and BoS - both stalking Abbey National - already on the clientlist, 2001 could be a big year for FI. At 331.5p and with a forward multiple of 37, the shares undervalue its growth potential and should be bought on any dips ahead.

SkyePharma A company lists on the stock market to raise money in the markets, right? Not if it's SkyePharma, the biotech-nology group.

Rather than tap its shareholders for cash to fund trials of DepoMorphine, a painkiller used after surgery, Skye-Pharma has turned to the venture capital industry. It has surrendered some 15 per cent of future royalties on DepoMorphine to Paul Capital Partners, a US private equity group, in return for $30m (£20m).

The group hails the deal as the first of its kind. Shareholders should hope it is also the last. Investors have already coughed up for DepoMorphine's development, in a £60m bond issue last year. Not only does SkyePharma appear to have underestimated the research programme's funding requirements, it has also failed to persuade a large pharma group, or a clinical research organisation, to act as a partner on the drug - never a good sign at the phase III trial stage.

Clearly, Paul Capital Partners couldn't resist such a large slice of the potential upside to DepoMorphine - some analysts say the drug could enjoy peak sales of $400m. But investors should question DepoMorphine's prospects now that management has readily ceded such a large chunk of its value. Indeed, SkyePharma, which already has about £67m in the bank and so doesn't exactly need money, has said it intends to use the fresh funds to accelerate development of other drugs.

Newsflow - of any kind - in the biotech sector continues to have a positive effect. SkyePharma's shares jumped 9.5p to 82.5p yesterday on news of the private equity deal. That provides a chance to sell.

Bright Station   It is hard to believe, but Bright Station, the e-business firm headed by Dan Wagner, the serial entrepreneur, has struck a deal with Intel, the world's number one chipmaker.

On the face of it, Intel's agreement to market Smartlogik Knowledge Management, its software used in Web indexing and searching, is seriously good news. Intel is the major player in the PC microprocessor market, but wants Bright Station to give it more potency in the market for the servers and the software that drives them. Intel is also to promote Bright Station's Sparza e-commerce software with its web-hosting infrastructure.

While it is hard to quantify the upside of this in terms of revenues and earnings, having Intel as a reseller, potentially on a global basis, offers real opportunity. Smartlogik is still being prepared for a flotation as soon as market conditions are supportive. Its likely valuation is plain guesswork just now.

Investors were happy to take a leap of faith yesterday, sending the stock soaring 45 per cent to 45p. Since Christmas, the shares have doubled, raising the company's market capitalisation to £78m. The gains have, nevertheless, done little to alleviate years of losses. Investors should await greater clarity about Bright Station's prospects before considering buying a piece of the action.

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