Technology boom paves the way
Sunday 24 March 1996
Computer service companies such as Admiral are a way of obtaining exposure to the global technology boom while sleeping easy at nights. There is an incremental quality to their growth that is unlike the boom-and-bust pattern of much of IT.
Three IT service companies I like are Brendish's Admiral at 988p, the bigger Logica at 545p and the bigger again Anglo-French concern, Sema, at 653p. These are highly rated stocks so do not expect too much in the way of immediate income. But they look capable of growing earnings per share at between 20 and 30 per cent for the foreseeable future. On that basis not only will they soon become cheap but the income can compound into a worthwhile annual return surprisingly quickly.
Logica is in part a management turnaround story. After many years of strong growth the company had lost its way in the early 1990s. Profits and the share price plunged until a new chief executive, Martin Read, was brought in as chief executive from GEC Marconi in August 1993. Dr Read set about turning Logica from a rather boffinish organisation into a business focused on profits.
Two key elements in this approach were "repeatability" and global integration. Repeatability means trying to use and re-use as much as possible of any particular computer solution to solve someone else's problem. The system was originally developed in the UK but has since been exported to New Zealand and recently an order was won in Ireland.
The results of the new approach have been spectacular. Pre-tax profits grew from pounds 7m to pounds 20m between 1992 and 1995, and recently reported half- figures showed a further 25 per cent advance in profits to pounds 9m. The order book is strong and the group has signalled that it is hopeful of winning significant business from some large proposals over the next 12 months.
Sema is also winning plenty of chunky orders for its still-dominant systems integration business that implements computer systems for companies. But the jewel in Sema's crown is its dramatically growing outsourcing business, which looks after the computer facilities of large companies. In the last few years, partly helped by acquisition, this has grown from 7 to 33 per cent of total Sema turnover and is expected to have reached 40 per cent of a significantly larger total group business by the end of 1996. The director in charge, Frank Jones, expects outsourcing business to grow by 30 per cent a year or more for the foreseeable future.
Sema has been doing well for years, with profits growing from pounds 15m in 1990 to pounds 37.9m for 1995. Investors had not paid much attention because some 80 per cent of the shares were locked up by four shareholders. But one of these, Cap Gemini Sogat, which attempted to take over the group in the 1980s, recently sold a 28 per cent stake to grateful institutions at less than pounds 5 a share. Since then, analysts have taken a closer look and come away impressed. The shares have shot up by around a third in three months but still look excellent value given the prospect of continuing growth.
Surrey-based Admiral, with turnover last year of pounds 65.5m, is by some way the smallest of the three companies but arguably has the most consistent record. Since 1987 sales have grown from pounds 8.7m and pre-tax profits, excluding exceptional items, from pounds l.25m to pounds 7.6m. Growth is set to continue, with analysts looking for pounds 9.6m this year and pounds 11.4m next year even before taking account of a new French acquisition. Admiral is paying pounds 5.2m in cash with a further pounds 1.9m deferred for a business that made pounds 0.7m last year.
This is the group's second move in Europe. Last year it acquired a Belgian computer services group, Delphy, for pounds 5.2m. That looks an excellent deal since Delphy's profits are running at around pounds 1m a year.
Admiral is a group with a strong culture. Staff training is given almost fanatical attention in a process known internally as "Admiralisation". Appropriately, the group has its own fast-growing subsidiaries offering training to third parties. It is also setting up worldwide sales networks to sell high-powered software packages for legal firms. In the year just reported average staff numbers grew by 27 per cent to 1,083 and have since grown further to well over 1,300. That gives a vivid indication of the sort of growth the group is looking for.
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