The Investment Column: Misys rides the software boom

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The Independent Online
Oh to be a large software group like Misys. It sells into booming markets - principally banking and healthcare - which are growing at breakneck speed. The structure of the industry is such that, once it has spent the money developing a product, every additional sale is pure gross profit.

Then a large chunk of its customers pay an annual licensing fee for the privilege of continuing to use the product. Misys' spread of customers allows it to buy smaller competitors and add value by pushing their products through its distribution network. In short, Misys is that rare creature: a cash-generative growth stock.

It's hardly surprising that its shares have doubled in value in the past 12 months. The creation of the Stock Exchange's new Information Technology index has also added froth to the share price. As the largest company in the sector, Misys is the most liquid stock for investors seeking to increase their exposure to IT. Since the beginning of December, shares have risen by over 30 per cent.

Profits increased by 36 per cent to pounds 32.1m, helped by two acquisitions in the banking sector made in December 1996. Demand for new systems that can cope with a European single currency boosted order books by 76 per cent. Cash flow was strong as usual, and the effects of the Asian market turmoil look manageable. And there's still the full benefit of last year's pounds 566m acquisition of medical software group Medic to come.

All well and good, but what kind of rating does this business deserve? Broker UBS forecasts full-year profits of pounds 86.8m, placing the shares, up 115p yesterday to 2175p, on a forward multiple of 33. Even for Misys, that's a bit toppy. For now, steer clear.