Investment Column: Fidessa is a good buy, but not at this level

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The Independent Online

Our view: Hold for now

Share price: 1155p (-53p)

Chris Aspinwall, the chief executive of Fidessa, the group that supplies trading platforms to the financial services industry, says buying the group's shares is a long-term bet.

The company posted impressive half year numbers yesterday, saying that revenues, profits and earnings per share were all up, and while the second half of the year will not be quite as impressive, the future is bright. Yes, shorter-term interest fluctuations may cause a mild headache, the group says, but with strong recurring revenues and a move towards globalised trading, the investment case is strong.

But before investors rush off to buy, they should consider that the stock is pricy. Mr Aspinwall says that he always refuses to comment on the share price, but with the shares up by almost 100 per cent in the last six months, investors may prefer to wait for a little softening before jumping in.

The watchers at Evolution argue: "Fidessa is on 18 times 2009 enterprise value to net operating profit after tax, a circa 50 per cent premium to global software. The results reinforce why the business deserves a premium rating but ... the shares have had a huge run and now look likely to consolidate through the third quarter."

Fidessa's figures – sales of £116m for the six months to end of June, and adjusted earnings per share of 29.7p – are undoubtedly good (albeit helped by favourable exchange rates) and ordinarily we would be very happy to back the stock. Indeed, we agree with Mr Aspinwall that over the longer term, investors are better off being holders of the shares.

We would not be buyers at this level however, and believe the premium is probably too high. If Mr Aspinwall is right and investors' strategy on Fidessa should be long term, then now is not the time to buy. We would wait for the premium gap to close before backing the group. Hold for now.

Ultra Electronics

Our view: Buy

Share price: 1190p (+50p)

While many private investors do not like it, often for good reasons, defence investments frequently pay.

Ultra Electronics, the FTSE 250 group that makes a range of electronic systems used by the defence industry, issued its first half numbers yesterday saying that pre-tax profits were up 32 per cent and that the order book had risen by 19 per cent. While the effect of acquisitions boosted the numbers – and that will not be repeated in the second half – the group is going great guns and investors will be particularly pleased to see the dividend increased by 20 per cent.

Chief executive Douglas Caster concedes that the defence budgets may be cut, but argues that as a "pure play" electronics company, Ultra is seeing its markets increase in size, especially in the US. Add to that the diverse nature of the company's sectors, and you have a winner, he says.

We would be inclined to agree, but would also be concerned that the message does not appear to be getting through to the wider market.

Those at Numis point out that "the stock has derated recently in line with its defence peers and now trades on 11.9 times 2009 price earnings ratio pre upgrades. This is close to an all-time valuation low for the stock and is a 27 per cent discount to its average rating of 16.5 times over the past decade."

Obviously, buying when the shares are cheap is the whole point, but in many cases the discount is because the market does not trust a company's bullish assessment of its own prospects. In Ultra's case, we reckon the doubts are misplaced and reckon the punt is well worth it, not least because of the dividend hike. We would be buyers of the stock. Buy.

XP Power

Our view: Hold

Share price: 257p (+34.25p)

Larry Tracey, the executive chairman of XP Power, the group that produces power control systems, tried to buy stock yesterday at 230p, but was unwilling to go higher when the shares got above that level. Nonetheless, he argues that with a dividend yield of eight per cent and improving industrial markets, the stock would be cheap at 300p.

Like Mr Tracey we would wait to see if the stock comes off its year highs before buying. Yesterday's interim results were good, but after a spike of 14.9 per cent yesterday, and after a jump of nearly 75 per cent in the last six months, we would be in no hurry to buy at this level. The watchers at Edison argue that 300p is an appropriate level for the stock, and maybe our caution is somewhat overstated. However, we see no reason why investors should be buying when the executive chairman is hoping that he can get the shares cheaper in a day or two. Hold.

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