Don't ask, just buy

Click to follow
The Independent Online
Warren Buffett, the star US investor who appreciates clarity, would probably not make a beeline for Rolfe & Nolan - the company's report and accounts are full of mind-numbing items like "platform-independent relational database tools".

But there are good financial reasons for trying to grasp what this group, which sells software and bureau services to traders in the futures, options and derivatives markets, is all about.

Since 1987, the group's sales have increased from pounds 2.2m to pounds 17m, with profits rising nearly ninefold to pounds 2.5m, and its share price has multiplied an incredible 14 times to 382p.

Rolfe & Nolan built its reputation on supplying customers with systems to administer their trading activities in futures and options, but is now looking further afield to treasury management. Chief executive Peter Dale says this market is between five and 10 times the size of the futures markets.

The group's share price, increasingly, is being driven by hopes that the group is, indeed, on the brink of a major breakthrough. Capitalised at pounds 48m, the valuation is clearly demanding against net assets of pounds 7.9m and after-tax profits of pounds 1.52m. Even forecasts of pre-tax profits reaching pounds 3m in the current year still leave the prospective price/earnings (PE) ratio well up in the 20s.

But the group's treasury management package, named Lighthouse, is a source of optimism. Dale hopes that big orders will accrue for it over the next few months. If so, there could be further share price excitement, given the size of the treasury market and the high profitability on software sales once development work has been done.

So far, the group has got only one customer for the computer system - Credit Suisse has installed Lighthouse in five locations at a cost of about pounds 3.3m. Rolfe & Nolan knows it will need to do more development work, probably with the first three or four customers, before all the wrinkles are ironed out. But then a vintage period could follow, with the double-whammy of rising sales and higher profit margins.

The significance of the sale to Credit Suisse is that the group now has the credibility of a major global bank using its software. As Dale says, a second sale could persuade others to sign up.

Credibility in this market is all-important. Treasury management is about banks dealing with other banks in complicated derivatives such as interest rate "swaps", "caps" and "collars". There is no clearing house and the work can involve multi-billion pound transactions. Mistakes are costly, so first-class systems and support are crucial.

Rolfe & Nolan has the software, the network and the reputation as a world-class player in back-office support. And, in the past two years its product range has been developed enabling banks with far-flung networks to to track their global activities 24-hours a day. In the latest year, recurring revenue covered 87 per cent of the global cost-base of the company's mainstream futures and options business.

The new shares are speculative since investors are paying a premium for a commercially unproven product. But given the company's reputation and strong balance sheet, the premium looks worth paying.

Comments