Shares: Sky's the limit with hi-tech high-flyers
Sunday 06 December 1992
One company that has already won considerable recognition is Micro Focus at pounds 26.55. The shares have come up from a low of 80p in 1988, though by US standards that is just warming up.
American investors are piling into the shares. The company, which recently acquired a US quote and reports in dollars and pounds, looks to have massive growth ahead. Since 1987 pre-tax profits have climbed from pounds 1.3m to pounds 18.1m, with pounds 21.7m expected for the year to 31 January 1993 and pounds 30m-plus the following year, helped by devaluation. The prospective 1993/4 PE ratio is 18.4 which doesn't look too demanding given the growth rate. The company's speciality is helping large corporations to improve the productivity of their computer programmers by doing mainframe work in the business language, Cobol, on personal computers.
Sales and profits took off in the later 1980s when the group launched a packaged product, Workbench, which has become a top seller worldwide. One US observer argues that the company has the potential to grow by 25 per cent annually for years ahead because it has still only addressed 10-20 per cent of the potential market of 560,000 programmers working for large corporations. A continual stream of new products and net cash balances of pounds 40m reinforce the growth picture.
A more speculative choice is Telemetrix at 74p, a company known until recently for making hefty losses. That reputation is fast disappearing partly because of a spectacular US purchase and partly because of changes at the UK end of the group.
Its acquisition of GTI Corporation, whose shares have climbed from dollars 1.50 to nearly dollars 29 in less than two years, evokes memories of Pentland's coup in buying a controlling interest in tiny Reebok before the latter became a global giant. Telemetrix owns 62 per cent of GTI after recently selling 3 per cent to clear its debts, leaving it with a stake worth over pounds 100m or 126p a share.
On top of that the UK group has other interests that have been rationalised for new managememt led by Arthur Walsh, formerly of STC, and Tim Curtis, formerly of Unitech. These interests are expected comfortably to make over pounds 2.5m in 1993 with a minute tax charge because of earlier losses. On a PE of 10 they should be worth nearly an additional 30p a share, which makes Telemetrix worth, on paper, 150p a share or double the latest share price.
A problem for UK investors is that the success of any investment in Telemetrix will depend on GTI, which may prove to be another short-lived US west coast computer wonder. But the risk looks worth taking.
GTI has taken off since 1991 after acquiring a 91 per cent stake in Valor, itself formed when key individuals left another US corporation to create products and services for the fast-growing LAN, or local area networking, business. Valor supplies products built into the boards used by all the leading players in the LAN business, so should do well whichever of its customers does best in the the marketplace. Next year's profits are expected to grow by 35 per cent to dollars 17.1m putting GTI on a PE not much over 20, with sustainable growth around 25 per cent expected thereafter.
Computer stocks often give investors a bumpy ride. Micro Focus shocked investors in the mid-1980s when accounting changes slaughtered profits; Telemetrix had a dreadful period until it acquired the boss of South Africa's leading electronics company as a major investor.
My third choice, Misys at 318p, also gave investors palpitations when analysts who had been expecting profits of over pounds 15m in 1990/1 were hit by a profits warning and a final outturn of pounds 5.6m. The shares collapsed to nearly 50p but the group, led by a former Hanson executive, Kevin Lomax, was down, not out, and is now making a spectacular comeback.
The story this time is more the classic recession pattern of countering weak demand by eliminating costs. Also, a start-up led by former employees in the group's financial services business, where it is the market leader supplying computer systems to the insurance industry, has collapsed leaving Misys firmly in charge.
The group reports a rebound in profits to 31 May 1992 of pounds 9.1m and the annual meeting heard that first-quarter sales had shown a 'substantial increase' from a year earlier.
Analysts are looking for profits of pounds 14m in the current year for a prospective PE of 12.6, and provisional estimates of pounds 15.4m for next year would soon be left behind if tentative signs of recovery in demand are sustained.
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