Investment Column: Royal blue

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The Independent Online
LOOKING AT the phenomenal rise of Royalblue's shares, you'd think the City of London couldn't do without it. And that's exactly so.

The company writes the software for investment banks to trade shares, helping them to make, or lose, those billions of dollars just a few seconds faster. The software also allows the banks to keep tabs on individuals' behaviour. That could help prevent another Nick Leeson affair. Is this why the City puts the shares on a premium to the sector?

Not exactly. The trading software accounts for a half of sales. The rest of turnover comes from software helping companies to monitor customer complaints. Lloyds TSB and BT are among Royalblue's clients here. Such orders, worth pounds 26,000, are notching almost 400 a year. Meanwhile, the group is introducing both types of software into the US, which now contributes a quarter of group revenues after sales rose 146 per cent in the first half.

Although its chief executive John Hamer refuses to be drawn on whether Royalblue can continue to deliver 50 per cent profits growth, its near- 50 p/e ratio puts it on a par with that kind of business. All Mr Hamer says is the way electronic share trading will develop around the world creates a favourable environment for Royalblue.

The fancy rating misses some risks. Unlike the UK market, the US market for its banking software Fidessa has a major, established competitor, Sungard. And while the group is keen to say there are no signs of a slowdown yet, fears over the millennium bug are likely to soften demand near-term.

Granville, the broker, expects full year pre-tax profits of pounds 5.9m and earnings of 11.8p per share, rising to pounds 7.4m and 14.5p in 2001. That puts Royalblue on a forward p/e of 48, well above the sector's 33. On this expected 30 per cent earnings growth, the shares are too high. Sell.