Investment column: Merant remains undervalued as e-business sales continue to grow

IF THE year 2000 ever spelt Doomsday for any company, it was for Micro Focus. The company specialised in making age-old computer systems Y2K compliant, so the value of its assets looked vulnerable the other side of the millennium.

Now called Merant, following its merger with a US software house, the group gives investors a headache for a different reason. Merant has transformed itself into an "e-business" outfit and understanding what it offers its customers is no mean feat.

The answer from Gary Greenfeld, chief executive, is everything that helps them into e-business. The services are gathered under the Egility brand name, which is about "extending legacy applications, integrating data ...and more".

Merant's new strategy has seen the company return to growth. In the second quarter, non-Y2K revenues grew 16 per cent year-on-year. Even so, falling Y2K revenues saw overall comparable revenues in the half-year fall from $182m (pounds 113m) to $180m. Y2K work now accounts for just 8 per cent of the business.

The trend in sales of the Micro Focus range of software and services, which help all parts of an organisation access its mainframe, is upwards. Merant's data connectivity business also strengthened, contributing to an increase of net earnings from $900,000 in the first quarter to $4.3m in the second.

Meanwhile, margins, currently 75 per cent, are heading upwards as merger synergies kick in. Merant also has around pounds 68m of cash to make small "tuck- in" acquisitions.

The shares closed up 41p, or 12 per cent, at 393.5p - a multiple of 28- times analysts' forecasts of 14.1p earnings per share this year, rising to 17.2p in 2001. While the shares have more than doubled since this column said they were undervalued in June, the possibility of further margin improvement and fast-growing e-business sales, means the rating still looks modest.