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Fidessa falls short

SHARE TIP: Fidessa (FDSA)
August 18, 2011

BULL POINTS:

■ Recurring revenue base

■ Cash pile

BEAR POINTS:

■ Weak banking sector

■ Slow regulatory decision-making

■ Failed foray into buy-side products

■ Price target well below the share price

IC TIP: Sell at 1590p

With the beleaguered banking sector still dominating the headlines, it's little surprise that Fidessa, which supplies trading and risk management software to banks, reported an uninspiring set of first-half results earlier this month.

Tellingly, the results for the period to the end of June revealed that, for the first time in some nine years, revenues from the software provider fell short of the City's expectations. Sales for the period, which came in at £137m, missed average estimates by about 3 per cent. This is worrying considering that more than 80 per cent of Fidessa's revenues are recurring.

But, with banks still scaling down operations and even closing their trading desks, churn - ie, loss of clients - has started to erode Fidessa's once mighty sales growth. Some months ago, Fidessa indicated that 7 percentage points of revenue growth was knocked off by churn alone in 2010, and cautioned that another 5 points could be lost in 2011. A further concern is that, because most of Fidessa's contracts last for at least four years, there may be more churn to come.

IC TIP RATING
Risk ratingHigh
TimescaleShort term
What do these mean? Find out in our

Banks' customers were expecting an uplift in trading during the first half of 2011, and boosted staffing levels to meet this. But the recovery did not materialise, leaving financial institutions reluctant to spend further on upgrading trading platforms. Fidessa's bosses were also anticipating help from tighter financial regulations. But these have not materialised as quickly as they had hoped. Management still believe that Fidessa will gain from the effect of tighter rules, but these won't start coming through for at least 12 months, so that does little to allay fears about the shorter term.

In anticipation of those eventual tailwinds, Fidessa had been expanding its buy-side and derivatives products. Hopes for this were pinned on the acquisition of buy-side order management business, Latent Zero, in April 2007. However, despite a series of initiatives to revive the division, analysts at broker Jefferies think that Latent Zero has failed to record any real revenue growth since its acquisition.

ORD PRICE:1,590pMARKET VALUE:£585m
TOUCH:1590-1601p12-MONTH HIGH / LOW:2,125p1,307p
DIVIDEND YIELD:2.7%PE RATIO:18
NET ASSET VALUE:344pNET CASH:£54.5m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200713517.134.418.0
200818936.080.124.5
200923931.059.830.0
201026239.777.833.0
2011*28143.986.442.8
% change+7+11+11+30

Normal market size: 400

Matched bargain trading

Beta: 0.9

*Jefferies International forecasts

Meanwhile, the fallout from Japan's Fukushima nuclear disaster has hampered growth in Asian markets, which would have registered the fastest growth of the group's divisions in the six-month period if the tragedy had not occurred. So, in the first half of the year, sales from Asia rose a meagre 7 per cent to £19m, hardly offsetting the slowing growth in more mature markets. In the UK alone, which still accounts for about half of group revenues, income grew by just 6 per cent over the previous half year, having increased by 10.5 per cent in 2010.

But this is part of a trend. Fidessa's underlying sales growth has been slowing for some time. Revenues grew 33 per cent in 2008, 17 per cent in 2009 and 10 per cent in 2010, and analysts expect organic sales growth of just 9 per cent this year.

Despite the raft of setbacks, and the lack of near-term impetus for the share price, shares in Fidessa are rated at over 18 times forecast earnings for 2011 (see table), which is markedly higher than the software sector average of 12 times. Analysts at Jefferies believe that the shares are only worth 1,460p on their discounted cashflow projections, but add that their figure could fall to 990p if spending in the banking sector remains constrained, established markets mature faster than expected and the effects of the Japanese disaster continue to dampen Asian growth.