Quantitative easing has a lot to answer for. Ben Bernanke and other profligate central bankers promised it would boost the global economy by reducing borrowing costs and encouraging job creation. What has actually happened is that many banks have simply handed the billions over to traders, who have ploughed the lot into gold, oil and commodities.
Indeed, speculators poured an estimated $60bn into commodities in 2010, the second-largest inflow after $76bn in 2009. Traders have built up massive positions in cocoa and copper. Last week, there were even scare stories of a single trader buying up ten supertankers full of North Sea crude.
But what’s bad news (in terms of rising inflation), is sweet music to the likes of Patsystems. This firm is a software developer that supports the electronic trading of financial derivatives and commodities. Customers include a host of blue-chip clients, such as JP Morgan, Citigroup, ABN Amro and Deutsche Bank, and a smattering of exchanges, such as those in Turkey, Argentina, Hong Kong and Vietnam. Here its platform will be deployed to transact futures and options contracts across numerous products, such as coffee, rice and rubber. Around 80% of the firm’s revenues are contracted, which provides nice earnings visibility.
That said, it hasn’t all been one-way traffic. In November the board warned that 2010 profits would be reduced by delays in signing a couple of software licences. Even so, the revised turnover and EBITDA estimates of £22.2m and £4.1m should still be up slightly on 2009 levels. On this basis, I would value the company on a 12 times EBITDA multiple. Adding in the £9.2m of net cash, that figure generates an intrinsic worth of about 31p per share. This is all very well, but what do we need to watch out for?
Patsystems (Aim: PTS)
Well, with Patsystems being a small company operating in a dynamic industry, some operational risks are elevated. Financial sector IT budgets are under pressure and the competitive environment is getting tougher. That said, Patsystems sells a quality product in a rapidly expanding arena, and should benefit as commodities become an investment asset class of their own.
Preliminary results are scheduled for Tuesday 8 February.
Recommendation: SPECULATIVE BUY at 26p (market cap £48m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments