Both public and private businesses are littered with high-profile IT failures, such as the collapse of the baggage-handling systems at Heathrow’s Terminal 5 and the NHS’s delayed electronic patient records programme.
Many of these problems could be avoided by fully testing new applications before they go live. This is where this week’s German-based gamble comes in.
The group is the world’s largest independent software tester. The European market for these services is worth a massive €13bn a year. The market is currently dominated by in-house teams, which have a 90% share of the market; and systems integrators such as Wipro, which account for about another 7.5%. These groups usually write and test the IT applications, but this traditional approach is not necessarily the best one. There is no objective sign-off, and the generalist testers also tend to lack the necessary expertise.
Gamble of the week: SQS Software (Aim: SQS)
So despite forecasts of a global slowdown, CEO Rudolf van Megen is still upbeat on SQS’s prospects. He expects its core market to double in size over the next four years as more companies decide to outsource this type of work to dedicated specialists. The group has a long list of blue-chip clients, such as Lloyds, BP, Anglo Irish bank and over half the Dax-30, with 55 accounts yielding two-thirds of its turnover.
The City expects 2008 revenues and underlying earnings per share of e157m and €0.44 respectively, rising to €173m and €0.48 in 2009. As such, the shares trade on a prospective p/e ratio of around nine times, which I think is attractive for a leader in a niche, but expanding sector. Of course, nothing is risk-free. If there is a tough round of corporate belt-tightening and its clients choose not to outsource as much work as anticipated, then SQS will be hit and will probably have to trim its headcount of more than 800 fee-earning consultants. The firm is also exposed to financial services (accounting for 28% of 2007 sales), although this weakness is being more than compensated for by booming demand in the petrochemical and utility industries.
Finally, the stock is not especially liquid, as the founders still own 37% of the shares. But none of this prevented either van Megen or the chief financial officer from buying shares after the publication of the full-year results. More adventurous investors should follow their lead.
Recommendation: BUY at 288p (market capitalisation £62m)