Uncertain outlook for Misys

Renishaw; Honeycombe  
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The Independent Online

Misys is back on the acquisition trail. The software group was yesterday softening up the City for some deals in the coming months. That always makes investors nervous, but may be just what the doctor ordered for the company's healthcare and banking divisions.

Half-year results for the period to 30 November came in according to the guidance given in December, but way below what the company had been suggesting just a few months before. It was last year's acquisitions that spared the blushes of Kevin Lomax, the chairman of Misys. In particular Sunquest, which supplies software systems for hospitals, came in ahead of expectations, with sales of £29m.

Group sales were up 18 per cent to £480m, but operating profits were 4 per cent lower and, after restructuring and acquisition write-downs, pre-tax profits were just £2.3m, compared to £37.4m.

Misys cannot drive the business through acquisition alone, and the market will have serious reservations about supporting the company until it starts generating growth from existing businesses again. Organic growth is currently running at minus 1 per cent.

The company was trying to distance itself yesterday from comments by Mike Lynch of Autonomy, that the worst is over for the software sector. "Cautiously optimistic" was the only guidance on offer, along with "at least the banking division hasn't got worse since December". Any substantial recovery is almost certain to be delayed until after the group's financial year-end in May.

Not everyone in the industry believes Misys has the most exciting portfolio of products and there are growing concerns about competition. Misys denied that it is losing market share among its banking clients, as strong results from the likes of Tenemos and Royalblue would suggest, and a giant rebranding exercise to bring its myriad software acquisitions under the Misys label could make the products look more attractive. But margins have been squeezed and banks' increasing tendency to outsource IT management is not going to help.

Even in healthcare, the recent tie-up of Pfizer, the world's biggest drug company, with Microsoft and IBM heralds much greater competition in the medium term. Mr Lomax will need to spend his estimated £200m acquisition warchest especially wisely.

Up 12.75p to 343p yesterday, the shares trade on 24 times analysts' forecasts of underlying earnings for the current year. That's in line with Misys's pre-bubble rating, but it is not entirely clear that it can return to its pre-bubble growth rates. The stock is one to be avoided.

Renishaw

Renishaw, a maker of industrial measuring equipment, is feeling the pain from the global economic downturn. The company is a world leader in making equipment that measures distances precisely ­ to within one millionth of an inch. Its devices are used in manufacturing, such as car making, for any process in which such precision is vital.

Although its customers in industry have long been in the doldrums, yesterday's statement from the company was even worse than expected.

A year ago, when Renishaw shares were riding high at 758.5p, this column said the stock was vulnerable to a US slowdown. Since then, the shares have tumbled, closing yesterday down 20p to 395p. Renishaw reported that pre-tax profit for the six months to 31 December dropped to £5.3m, from £13.9m. This was despite the fact that turnover was down just 15 per cent at £51.2m. The company has large fixed costs and its research and development expenditure is unusually high. Renishaw's products are genuinely hi-tech.

The group, which is more than 50 per cent-owned by its founders, is dependent on US, Japanese and German markets and the news is not good from there. Old Mutual forecasts full-year profit of £13.5m, putting the stock on a forward multiple of 27. With no recovery in sight, that's plenty high enough.

Honeycombe

Honeycombe Leisure is undervalued. The group owns 75 tightly managed pubs and is fizzing with ideas for making the most out of them. Hence, 5 per cent sales growth over Christmas and a 2 per cent rise in underlying profits for the six months to October.

At a pre-tax level profits slid 45 per cent to £889m. Interest charges have soared since the acquisition of Devonshire, but the benefits from bulk beer buying and head office savings will show through this year. Honeycombe promises that its bankers are in no hurry to have debt paid down. The stock, at 62.5p, is on just 8 times this year's earnings and 7 times next year's. That's an unjustified discount to the sector.

A bid approach has come to nought ­ this time ­ but the group is valued only slightly ahead of net assets and the downside is limited. Buy.

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