Paul Hill picks out a software and IT services company that supplies to government and travel firms and wireless telecoms. Despite strong growth in the latter division, the stock is looking oversold.
Tip of the week: Anite (AIE), rated a BUY by Landsbanki
Anite is a software and IT services company, selling mainly to wireless telecoms, government and travel firms. Its applications centre on its own software, from which it earns licence fees and maintenance revenues. But it also provides project management, systems integration and managed services. Around 33% of its £172m sales are recurring.
The jewel in its crown is the wireless division, which accounts for about 40% of revenues yet delivers 70% of profits due to its 28% operating profit margins. Wireless provides specialist applications for testing mobile-phone handsets and networks, with blue-chip clients such as Nokia and Sony Ericsson. The sector is growing at around 12% a year, driven by the roll-out of new technologies – such as 3G, HSPA and WiMAX, greater demand for premium handsets, and rising growth from emerging markets. Another unit provides IT products to travel firms (such as TUI) in the UK and Europe. Customers can either license the software and run the systems themselves, or buy a full package, with Anite managing it from one of its data centres. Travel represents 17% of turnover, generates operating margins of 23%, and is expanding at a healthy 11% a year.
So far so good, but the problem child has been the public sector unit (PSD), which is ear-marked for disposal. PSD supplies more than 400 public-sector organisations with local tax collection, benefits payments, housing management and social care applications. It is also an important supplier of ‘secure information solutions’ (SIS) to criminal justice departments. But the largest activity in terms of sales growth has stalled and margins are much lower at around 8%. I reckon Anite should realise about £80m from selling the unit.
Applying a sector p/e multiple of 17 values the rest of the group at £280m. After deducting net debt of £20m and £10m for restructuring costs, this gives a sum-of-the-parts price of around 90p per share, or 25% higher than today.
So why the wide discount? The problem is that until PSD is sold, the City is concerned that Anite’s resources will remain too thinly spread. Dollar weakness is also causing a headwind (especially in wireless), while on 19 September the firm said it had experienced its “customary” slow start to the new year. Wireless had traded “slightly” below expectations due to “current tightness” in some customers’ budgets, with travel “comfortably ahead” and PSD in line. Anite said it was “cautiously optimistic” on prospects, but this would mean a more pronounced second-half weighting than usual. Order intake was also slightly down due to strong comparatives.
But I believe that the stock is now oversold as there seems to be substantial value in the group that management is keen to unlock. At present levels, trading at less than 12 times 2007/2008 earnings, this hi-tech stock should be tucked away for the long term. The directors seem to agree. Two weeks ago, the chief executive, the finance director and chairman all piled in, buying 272,000 shares at an average price of 68.3p. Landsbanki has a 12-month target of 123p.
Recommendation: BUY at 72p
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