Investment Column: Misys can benefit from banking recovery

UK Mail; Intercede

Our view: Hold

Share price: 243.5p (+1.4p)

When we last looked at Misys a year ago, it had issued a sprightly interim management statement that pushed its shares up by more than 13 per cent to 129.5p. Several analysts promptly suggested taking profits, which would have been very foolish because the stock has come close to doubling in value since we said "hold".

Yesterday, the company produced another upbeat IMS for the third quarter and, while the shares did not do much in response, it did speak of a business in reasonably good health, with revenues up 7 per cent, operating profits up 18 per cent and net debt halved to £59m.

Misys does a mix of different things, supplying software to most of the top banks and the US healthcare market. The latter is in robust health, but the former is still suffering from the effects of the credit crunch and banks' continued unwillingness to spend on IT in favour of building up their battered capital bases (although the capital markets division is doing well).

The third-quarter numbers suggest that, overall, Misys has some momentum behind it. It has said it should meet its full-year targets with the help of a robust pipeline of business. That said, on valuation grounds, Misys is not at all cheap at 17 times full-year earnings. Its majority-owned US healthcare software provider, Allscripts, accounts for a lot of that; it is on 29 times, which leaves the remaining Misys business on just 7 times. Given that the capital markets business is performing well, and banks will not be able to scrimp on IT spending forever, that is arguably rather cheap.

Time for a demerger, then? Maybe, but it is a tough call. Misys is in good health but we have had a very good run from these shares and anyone who got in below 129.5p could happily take profits. However, that would miss out on a banking recovery, which will happen before too long, so hold.

UK Mail

Our view: Buy

Share price: 327p (+15p)

UK Mail will report its preliminary results for the year to March on 19 May, but investors got a taster when yesterday's upbeat pre-close trading statement forecast flat revenues in line with expectations. Although the company offered few specific figures – only that group revenues rose by 2 per cent year-on-year in the fourth quarter – it nonetheless stressed a "good trading performance" and confidence about the outcome for the full year.

UK Mail, which used to be called Business Post, has seen improvements across all of its activities. Most notably, its parcels division continued to advance throughout the second half, with volume growth of about 10 per cent sufficient to offset pressures that have wiped about 5 per cent off prices. Meanwhile, the mail business has also made progress.

The company's iMail and Packets+ services both have considerable potential, helped by a deal struck with Royal Mail for a packet collection and delivery service using Royal Mail for the final delivery. Investec said yesterday: "iMail could potentially develop into a £5m to £7m earnings contribution business and now, with the packets offering, UK Mail can address a further £1.5bn of market opportunity."

The group's low debt, and hints that the board might reinstate a progressive dividend policy, add to its attractions. The shares trade on 14.4 times forecast full-year earnings, with a tasty yield of 5.3 per cent. With negligible debt, that yield and continued growth expected in the mail business as the industry undergoes radical change, we say buy.

Intercede

Our view: Buy

Share price: 39.5p (-1.5p)

Shares in Intercede fell when the company, which makes software that dovetails with identity card systems, said its pre-exceptional operating profits for the full year would miss market expectations. Time to sell, then? Maybe not. Investors can take heart from the flow of orders over the year, which point to a healthy pipeline. More recently, Intercede announced the settlement of patent infringement disputes in Britain and the US. Last night, it said the patent licence agreement included in the settlement was not expected to affect its current or future earnings materially.

The uncertainty about the UK's national ID card scheme may make some wonder whether its time to bail out. We think not, primarily because the Government's plans never got very far in the first place. We have no way of knowing Intercede's involvement in the project (the company cannot comment) but we suspect it is fairly limited.

If the election leads to the scrapping of the whole enterprise, which seems highly likely, we reckon Intercede's position is likely to remain broadly unchanged. At 10.1 times FinnCap's full-year forecasts, i is not at all pricey so we are happy to keep buying.