Mike Lawrie, chief executive of Misys, was in an ebullient mood yesterday after presenting first-half results for the banking and healthcare software house. His enthusiasm was not shared by the stock market, which marked the company’s shares down 5 per cent.
That weakness followed a downgrade in the company’s organic growth rate to between 2 per cent and 4 per cent, from 5 per cent to 8 per cent previously, after a 1 per cent like-for-like revenue decline in the first half to £363 million.
However, that paring of forecasts masked a number of more positive signals. For a start, Misys’s operating margin guidance of between 18 per cent and 20 per cent was much higher than analysts had pencilled in and the recovery of the company’s treasury and capital markets business bodes well for the rest of the year. The unit picked up 14 new customers in the first half and Mr Lawrie remains confident that the financial services sector is starting to spend on IT again. Even in its banking division, where sales fell 11 per cent during the first half, the outlook has improved. It has signed up six banks to its new BankFusion platform. Mr Lawrie contends that the downturn in banking IT spending was actually well timed for Misys as it gave the company time to invest in developing new products.
With Allscripts, the US healthcare business in which Misys owns a 55 per cent stake, recording double-digit growth at the net income level, the company is set for a solid second half. There was also encouragement on Misys’s balance sheet — it has set itself a target to cut net debt to between £20 million and £30 million by the year-end, from £120 million in the first half.
The problem is that, at 209¾p, or 19 times current-year earnings, much of Misys’s recovery is already priced into the shares. However, once the implied £1 billion value of the Allscripts stake is stripped out, the rating for the remaining businesses falls to a lowly five times earnings. On the view that Misys will act soon to address that gap, sit tight.
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Filtrona
It has been a long, slow drag for Filtrona. Five years after the mid-cap maker of cigarette filters was spun off from Bunzl, its shares — unlike those of its former parent — are stuck stubbornly below their demerger price.
Yesterday’s year-end trading update raised hopes of better gains ahead. Filtrona’s biggest business — making filters for the world’s leading tobacco brands — remains as defensive as ever. Fourth-quarter sales were up 8 per cent, helped by the steady tilt of its operations towards higher-growth emerging markets. What has changed is that Filtrona’s more cyclical non-tobacco businesses, which account for the remaining half of revenues, are showing tentative signs of improvement.
Take MSI, the Texan offshoot that makes plastic caps that prevent damage to oil and gas pipes in transportation. It was hit hard last year by a slump in gas drilling activity in North America and divisional sales are still down 25 per cent on the year. But Filtrona reports that orders have picked up in recent weeks and, given their traditional link to US rig activity, which is now on the rise, might be expected to continue to do so.
Other businesses geared to a rebound in manufacturing activity, such as providing hose protectors for hydraulic machinery, should follow suit. Elsewhere, Filtrona is showing the benefit of recent product innovation. The initial take-up of new porous materials for surgical wound care and ink reservoirs for next-generation printing cartridges, used by the likes of Hewlett-Packard and Lexmark, is encouraging.
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Filtrona’s failure to spur profit growth through substantial acquisitions is frustrating — since demerger, it has sold as many businesses as it has bought. However, it is now focused on four higher-margin, cash-generative niches and net debt, now £107 million, is falling faster than expected. At 194p, or 11 times earnings, and yielding 4 per cent, the shares have farther to run. Buy.
Mecom
Mecom, the continental European newspaper publisher, has generated more than its fair share of column inches over the past 12 months.
The unravelling of an overaggressive acquisition strategy; a failed attempt to unseat David Montgomery, the company’s austere chief executive; a £944 million pre-tax loss; and a deeply discounted £142 million rights issue have all prompted the sort of headlines that the company could do without.
But Mecom stood out for very different reasons yesterday after a better than expected trading update sent its shares up 27 per cent. The rate of advertising declines in its four markets — Denmark, the Netherlands, Norway and Poland — has rapidly eased to minus 8 per cent in November and December against minus 18 per cent in the previous four months; circulation revenues have increased slightly on the year; and cost reductions, at €140 million, were nearly double its €75 million target. At about £123 million, last year’s operating profits will be substantially ahead of forecasts.
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Mecom’s allure is a stable of regional titles that have little or no competition and which draw the majority of sales from subscription rather than casual purchase — about 97 per cent in the case of the Netherlands. That position augurs well for Mecom’s preliminary moves to charge for online content. The more immediate opportunity is to raise the company’s operating margins from between 5 per cent and 6 per cent towards double digits — whether through cutting back office costs, new products or cyclical recovery. At 165¼p, up 35p, or nine times 2010 earnings, hold on.