The Investment Column: Sema Group

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The Independent Online
STARVED FOR large-cap technology plays like those found on the Nasdaq index, British and European investors have snapped up shares in fast-growing technology services firms such as Sema Group. Buoyed by healthy profits and sales growth rates, Sema shares have soared three-fold over the past three years.

Half-year results yesterday kept that trend alive. Pre-tax earnings rose 35 per cent to pounds 35.8m; turnover climbed by a quarter to pounds 669m. The stock added 7p to 697p as investors drew encouragement from a record order book that stands at pounds 1.8bn, and rising, and a book-to-bill ratio of 1.12. Sema is probably right in its assessment that these factors will minimise any significant downturn arising from the millennium bug and an expected slowdown in IT spending.

But in the long term, Sema's growth prospects appear unlikely to match their historic 30 per cent plus per year advance. One reason is that outsourcing - nearly half of sales - is becoming more competitive. Margins here are tightening. Investment in products such as SemaVision, a customer care and messaging system for mobile network operators, is a good example of what the company must do to develop higher margin products that exploit intellectual property.

Meanwhile, the plan to build up US sales to $1bn per year from around $30m is proceeding slowly. Obviously chief executive Pierre Bonelli is right to take his time in doing a deal. The question is whether Sema can compete against aggressive US technology firms in acquiring cutting edge companies involved in product development and systems integration.

With 1999 earnings forecast to be around pounds 93m, Sema is on a prospective profits to earnings ratio of 47, about double the expected percentage gain in earnings. A profits to earnings growth premium of that sort, well outstripping global technology powerhouses such as Microsoft and Oracle, is just too high. Sell.