Bad headline after bad headline, organisations are gradually waking up to the importance of data security. Not to mention the benefits of storing information remotely, wireless connectivity and the use of software to improve efficiency and workflow. The FTSE 350 companies that provide these services are making the most of it, but many also face fierce headwinds in their major markets.
A good example is Computacenter (CCC). The IT services and equipment group is enjoying strong demand for networking and data centre equipment in the UK and Germany, but its French business continues to flounder. The company has responded by refreshing management teams, slashing headcount and refocusing the business on its most important clients.
Similarly, Fidessa (FDSA) has benefited from buoyant demand for its workflow, trading and compliance software since the financial crisis, but regulatory pressure and widespread cost-cutting have led to closures, consolidation and restructuring among the banks and insurers it targets. Engineering and design software specialist Aveva (AVV) enjoyed a respite from torrid trading in energy and shipping markets in the form of an agreed reverse takeover by Schneider Electric - but the pair nixed the deal after identifying significant integration costs and risks.
Not all of the sector's courtships have ended in heartbreak. Micro Focus (MCRO) - which modernises companies' ageing mainframes and servers, allowing them to communicate with the latest tablets and cloud-based applications - has generated sizeable cost savings and broadened its product range since its $2.5bn (£1.8bn) takeover of peer Attachmate in 2014. Also Telecity (TCY), which owns and operates around 40 data centres across Europe, was recently acquired by US rival Equinix.
Meanwhile, the flurry of data thefts and hacks at TalkTalk, Experian and other companies has fuelled demand for cyber security. NCC (NCC), which provides risk consulting and website testing, safe data storage and a gated online community for brands, is placing big bets on this fast-growing market. For example, it recently acquired Dutch peer Fox-IT in a bid to strengthen its threat analysis and fraud detection business and broaden its range of services. And industry giant Sophos (SOPH), which joined the London market last summer, continues to grow quickly and launch new threat detection and rapid-response products.
| Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change | Last IC view | |
|---|---|---|---|---|---|---|
| AVEVA GROUP | 1,406 | 899 | 22.2 | 2.2 | 5.3 | Hold, 1,530p, 17 Dec 2015 |
| COMPUTACENTER | 823 | 1,009 | 16.9 | 2.4 | 26.6 | Buy, 756p, 01 Sep 2015 |
| FIDESSA GROUP | 1,864 | 713 | 23.9 | 2.0 | -24.0 | Sell, 2,158p, 04 Aug 2015 |
| MICRO FOCUS INTL. | 1,430 | 3,112 | 14.7 | 2.3 | 35.3 | Hold, 1,502p, 10 Dec 2015 |
| NCC GROUP | 299 | 823 | 30.6 | 1.3 | 38.6 | Hold, 302p, 22 Jan 2016 |
| SAGE GROUP | 567 | 6,118 | 23.7 | 2.3 | 20.9 | Hold, 564.5p, 02 Dec 2015 |
| SOPHOS GROUP | 241 | 1,087 | 9.6 | 0.0 | NA | Hold, 270p, 11 Nov 2015 |
Favourites
Computacenter is growing steadily and generating plenty of cash, paving the way for another payout for shareholders. Similarly, Micro Focus's takeover of Attachmate has thrust it into growth markets such as open-source enterprise software, and analysts predict that the company will resume paying special dividends within two years. Shares in Computacenter and Micro Focus trade at 16 and 14 times consensus forecast earnings respectively, leaving room for a re-rating.
Outsiders
Fidessa has rolled out new compliance, workflow and data analytics products that promise to quench its clients' thirst for cost-cutting and efficiency. But its shares trade at 24 times consensus forecast earnings, which looks fair given the depressed financial services market. Sage (SGE) has continued its shift from one-off software sales to subscriptions, payments and mobile products, and is rolling out new products internationally, but the accounting and payroll giant will struggle to revive its growth rate. For Aveva, the collapse of the Schneider deal, the depressed oil price and weak end-markets are all likely to weigh heavily in 2016.
