FI Group makes a bundle on software; The Investment Column

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The Independent Online
FI Group, like Misys the day before, showed yesterday just what exciting returns are available from the computer software market. The group, once notable for its predominantly female board and these days more famous for the 47 per cent stake held by employees, remains relatively obscure. Yet it can trace its origins back to 1962 and claims market leadership in the growing market for applications management software.

The shares have zoomed since the group floated at 235p last April and yesterday's results give a clue why. Pre-tax profits jumped 34 per cent to pounds 2.81m in the six months to October on turnover up nearly a quarter. Like Misys, much of the growth is coming from the financial services sector, which recorded the fastest rate of increase in the latest period.

The quality of this business is exemplified by a contract with Barclays Bank worth pounds 15m over five years signed last June. The deal cemented an existing, less secure relationship with the bank and was perhaps the biggest vote of confidence amongst a number of prestigious deals won over the past six months or so. These included a pounds 9m, four-year agreement with Legal & General in June and, more recently, a five-year contract with NatWest's retail banking arm, also for pounds 9m.

The increasing pressure to cut costs in financial services companies, previously heavily dependent on people, is driving the move towards more and more automation using computers. From FI's point of view, that trend is being accelerated by the growing fashion for outsourcing, with applications management one of the fastest expanding sectors of that market. Thus finance represents 39 per cent of FI's sales, up from 36 per cent before.

But the same imperative is driving other industries, exemplified by a four-year deal struck with J Sainsbury in December worth pounds 13.5m. Clearly FI is doing something right with the retailer, as the contract extends a relationship already seven years old.

At the end of October, the group had increased its order book by 8 per cent to an impressive pounds 77.7m, of which half represented work stretching beyond 12 months. Given this ability to maintain long-term relationships with customers, the fact that just 20 of them account for 70 per cent of the revenue is probably more of a strength than a weakness.

This is a business growing fast and the need to rapidly recruit and train bright young computer programmers could prove a drag on the figures. More seriously, it will test the strengths of a management still new to the rigours of being in charge of a listed company.

On Granville Davies' upgraded forecast of profits of pounds 6.1m for the full year, the forward price/earnings ratio of 46, with the tightly-held shares up 1.5p to 599p, is leaving very little to chance. High enough.