For a company experiencing little to no growth and with seemingly modest recovery prospects, Fidessa (FDSA) certainly commands a heady rating. The financial trading software group has seen its shares rise by over 50 per cent since the start of 2013, despite stagnant sales, and they now trade on a staggeringly high 28 times consensus forecast for earnings over the next 12 months, well above the peer group average of 21 times and only slightly below its peak rating of 30 times reached in March 2014.
- Highly cash-generative
- Attractive yield
- Dominant position in core market
- Barely growing
- Expensive valuation
- Increasing competition
- Adverse currency movements
True, Fidessa has always been highly rated by the market, and for good reason. Since 1997, the financial trading software group has delivered around 25 per cent compound annual revenue growth; its customer base has grown to include 85 per cent of the world's premiere financial institutions; more than 85 per cent of its turnover is recurring; and the group's exceptional cash-generation allows it to regularly pay out substantial dividends.
The problem is, Fidessa stopped growing several years ago. Turnover was flat year-on-year in 2013 and has barely risen since 2011; earnings increased just 3 per cent over the past two years. Worse, Fidessa appears likely to continue to flat-line for the next couple of years at least: analysts at UBS actually expect EPS to fall slightly in 2014, due to adverse foreign currency movements, before recovering modestly in 2015 and growing in the mid-single digits if all goes well after that.
FIDESSA (FDSA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,300p | MARKET VALUE: | £874m | |
| TOUCH: | 2,292-2,316p | 12-MONTH HIGH: | 2,672p | LOW: 1,783p |
| FORWARD DIVIDEND YIELD: | 3.7% | FORWARD PE RATIO: | 27 | |
| NET ASSET VALUE: | 393p* | NET CASH: | £73m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 278 | 42.5 | 82.2 | 81.5† |
| 2012 | 279 | 42.0 | 82.5 | 82† |
| 2013 | 279 | 43.1 | 85.5 | 82† |
| 2014** | 280 | 41.2 | 82.2 | 82 |
| 2015** | 295 | 43.9 | 85.8 | 86 |
| % change | +5 | +7 | +4 | +5 |
Normal market size: 500 Matched bargain trading Beta: 0.82 Ex-div: 14 May Payment: 13 Jun †Includes special dividends of 45p in 2011, 2012 and 2013 *Includes intangible assets of £89m, or 236p a share **UBS forecasts | ||||
Notwithstanding roaring global equity markets, Fidessa's customers - mainly banks, brokers and asset managers - have never fully recovered from the 2008 financial crisis; the industry, at least in Europe, continues to consolidate and occasionally lose its weakest firms to bankruptcy. Alongside increasing competition, this has led to customer attrition in its core market - equity trading - with European revenues falling 7 per cent in 2012, 5 per cent in 2013, and, if broker forecasts prove correct, 3 per cent in the current year. Expansion in Asia and America is partly offsetting this as is the 5 per cent of sales from the fast-growing derivatives business, but Europe still accounts for 43 per cent of revenues. And while Fidessa's new derivatives trading software is indeed growing strongly, it accounts for less than 5 per cent of total turnover.
Granted, these headwinds are starting to subside - illustrated in the chart below by the reduction in the decline of earnings growth over the past few quarters. But the modestly improving outlook has coincided with a sharp re-rating of the company's shares during the latest rally in tech stocks, meaning much of the expected future improvement in trading is already factored into the share price.
A return to growth is far from certain, too, judging by chief executive Chris Aspinwall's latest statement: "Fidessa has continued to see improvement in the trading conditions faced by its customers…[but] this improvement is somewhat uneven and means that many customers are still not able to make investment decisions with confidence."
