The Investment Column: Misys banks on financial clients

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The Independent Online
Misys, Britain's biggest home-grown software group, was floated nearly 10 years ago, but it was only two years back that investors really woke up to the group's potential. The shares, down 4p at 1112.5p yesterday, have multiplied 3.5 times since March 1995, boosted in part by US buying. The big question is how far this rerating still has to run.

The record is impressive, with profits soaring from pounds 9.12m to pounds 50.4m in just five years, although last year's 91 per cent rise will be hard to repeat in the short term. Yesterday's interim results, showing pre- tax profits up 23 per cent to pounds 23.7m in the six months to November, were more than respectable, despite some disappointment with the 10 per cent growth in sales to pounds 143m.

Admittedly Misys is no Microsoft. The company does not produce the basic operating software for computers, but rather packages tailor-made for specific applications. But it has what looks like an unassailable position in supplying software for financial services customers ranging from banking to insurance, a market which represents more than 90 per cent of its business. The group is four to five times the size of its nearest banking competitor, boasting 45 of the world's top 50 banks as clients, yet has less than 10 per cent of a world market which is growing fast.

Banks spend a whopping $47bn a year on information technology, a figure which is rising at around 8 per cent a year, driven in the West by cost- cutting and in South-east Asia by the rapid growth of banking networks and securities trading. The market for software to trade derivatives is alone growing at more than 35 per cent a year.

Currently only around 10 per cent of the whole business is outsourced, but Kevin Lomax, Misys chairman, expects that proportion to double in the next three years. Meanwhile, he is taking advantage of the trend of consolidation in the industry by vacuuming up the competition. At the end of last year, Misys strengthened its position in the US by picking up two local players, Frustum and Summit, for $93.7m down and $49.7m deferred over three years. More fill-in deals can be expected.

With new business running 15 per cent ahead, full-year profits of pounds 64m should be in sight, putting the shares on a forward multiple of 20. That is high enough for now, but this is one to lock away on any weakness.