Investment Column: Autonomy set to grow as markets crumble
Hays Group; Sport Media Group
Friday 09 January 2009
Our view: Buy
Share price: 1052p (+71p)
Data management is hardly the jazziest of sectors, but as the markets crumble and regulatory pressures increase, it is guaranteed to be a lucrative business this year.
The software giant Autonomy has already come a long way in just over a decade. The group was founded in 1996 in Cambridge, and its operations were based on technology researched at the university. It has since rocketed in value, and is a member of the blue-chip FTSE 100 index with a market capitalisation of about $4bn.
Autonomy also seems to be well placed to face the worsening economic conditions. Yesterday, it put out a confident trading statement that said it would beat full-year revenue expectations.
It is a counter-cyclical stock, and as regulation and litigation increases in the current climate, senior managers are looking for protection from cutting-edge systems. Autonomy provides systems to track "unstructured data" including emails, voicemails and video.
Analysts point out that "e-discovery" is a particularly growing area, especially as new legislation comes in. This will help companies to group evidence including emails and instant messages to the courts in the shorter 99-day deadline. This could bring in an extra $50m in revenues for the group.
Autonomy's clients include some of the largest financial services groups, including Deutsche Bank and Citigroup, and organisations such as Shell, GlaxoSmithKline and the BBC. Analysts are expecting a slew of deals to come. This week it announced a further four contracts, including with BAE and Statoil. It trades on 12.5 times Teathers analysts' 2010 de-geared forecasts, which could well look cheap at the end of the year. Some are predicting, if unstructured data management takes off, that the company could grow 20 per cent for a decade.
The group has expanded throughout the 2000s with a series of well-timed acquisitions, and may be looking at assets this year. Many rivals have hit distressed levels and could struggle to survive without intervention. The shares were up yesterday, but it is worth having a few of these in your portfolio.
Our view: Sell
Share price: 76.25p (-0.25p)
The recruitment company Hays has suffered as theeconomic chill worldwide puts companies off hiring for the time being. Britain's largest employment agency said revenue fell 10 per cent on a comparable basis in the three months ended 31 December, as conditions worsened in most of the 27 countries in which it operates. Hays has cut over 500 jobs globally to save costs, with about 350 of the losses in the UK.
Its shares are trading at less than half the value they held in 2007, at the height of the last economic boom. They have fallen by more than 15 per cent in the last year. But most stocks have fallen as the market corrects itself after years of exuberance, so this does not make them cheap. In fact, the stock, trading at more than eight times expected earnings, remains more expensive than those of its main rivals. London-listed Michael Page trades at just over seven times, and is similarly geographically diversified. Randstad, the Netherlands-based recruitment firm that operates heavily in continental Europe, trades at just under five times projected earnings. So, either way, Hays' shares look overpriced. And with economies slowing and employment outlooks worldwide getting worse by the day, there is unlikely to be good news to boost their value any time soon. Sell.
Sport Media Group
Our view: Sell
Share price: 5.5p (-2.5p)
It looks like another media group may be going, ahem, tits up. The Daily and Sunday Sport publisher was hit by its second piece of bad news in as many days yesterday after it revealed it had slumped to £18.6m pre-tax loss last year.
This comes less than 24 hours after Sport Media Group (SMG) admitted it had breached a banking covenant and had so far been unable to renegotiate its debts with lending banks.
Yet SMG, which publishes the downmarket tabloids as well as digital content – well, nudie pictures of girls – for the internet and mobile phones, said it was optimistic about underlying prospects. It has slashed costs, and the falls, announced in full-year results yesterday, came from a goodwill impairment charge. With that stripped out pre-tax profit was up 7 per cent year on year to £6m. All the same, trading is worsening as circulation has slumped on both titles.
This is a terrible time to invest in media companies. Advertising revenues are spiralling and the cost of newsprint is set to soar. Everyone is cutting staff and costs and there doesn't seem to be light at the end of the tunnel. Despite what the group calls its "particular niche," it's hard to see where the upside in the shares will come from. Drop it like it's hot.
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