Adjusted pre-tax profits fell 11 per cent to €2.4m in the first half at SQS after the software testing firm recruited 200 new consultants to builds up its managed services arm.
This makes perfect sense as managed services work brings in better income visibility with a typical three-year contract duration, compared to only three months for ad-hoc project work. Of the 91 new clients won during the six month period, 10 were managed services agreements, including its biggest ever - a three-and-a-half-year deal with an existing customer worth €15m (£12.5m). This helped managed services revenue rise 25 per cent to €25.4m for the half and the division has forward orders of around €40m. This reflects a brighter business climate that saw overall sales grow across all regions, including Germany, its largest single market, where revenues rose 2.5 per cent to €33.2m, reversing last year's decline.
But the inevitable hit on operating margins leaves SQS chasing a steep €2.1m improvement on last year's second half adjusted pre-tax profit of €4.3m to hit Altium's full-year pre-tax profit estimate of €8.8m and EPS forecast of 22.2¢ (from €7m and 21.3¢ in 2009).
SQS SOFTWARE QUALITY SYSTEMS (SQS)
|ORD PRICE:||180p||MARKET VALUE:||£49.1m|
|DIVIDEND YIELD:||3.2%||PE RATIO:||16|
|NET ASSET VALUE:||232¢*||NET DEBT:||12%|
|Half-year to 30 Jun||Turnover (€m)||Pre-tax profit (€m)||Earnings per share (¢)||Dividend per share (¢)|
*Includes intangible assets of €60.3m, or 221¢ per share
Profits are now heavily weighted to the second half which increases risk, but analyst earnings forecasts should be achievable assuming a recovery in second half margins and full-year sales growth of around 6 per cent. On this basis, and trading on 10 times earnings estimates, the shares remain good value.
Last IC View: Good value 215p, 11 March 2010