Paul Hill, one of Britain’s most successful private investors, suggests a share for the brave. This week: a once-sinking ship that looks to have been rescued.
Gamble of the week:
InTechnology (Aim, ITO: 39p)
InTechnology is a UK provider of IT infrastructure services to corporations, and generated sales of £215m in the year to March 2006. The services provided are data storage, IT security, managed services (such as Voice over Internet Protocol, or VoIP) and application hosting. Customers include construction firm Galliford Try, furniture retailer Barker and Stonehouse, and the London Borough of Bromley.
Over the past five years, InTechnology has been through the proverbial grinder. Back in 2001, its shares traded as high as 400p, only to be hit by the painful recession in the IT sector. In April 2005, the chief executive resigned after the strategy of expanding into continental Europe backfired and the company fell into the red.
Peter Wilkinson, the original founder of the company, has returned to rescue the sinking ship. With his vast knowledge of the organisation and industry, over the past year Wilkinson has set about restoring the IT group to profitability. InTechnology’s loss-making European division was sold for £21m in March 2006, wiping out most of the company’s debt, and the UK IT distribution division has been restructured.
On the release of the March 2006 results in June, the company’s board announced that Wilkinson’s turnaround had “resulted in a strong recovery in the second half of the year” and that InTechnology was in “good shape to further increase profits”. Operating profits before goodwill, amortisation and one-off costs were £4.8m on slightly higher turnover, which I estimate would have generated earnings per share of roughly 2.4p. This is an excellent performance in such a short period, particularly in light of the margin pressure in the British IT sector.
The jewel in the company’s crown is its managed services division, which delivers IT services under long-term contracts. Encouragingly, these recurring revenues grew by 14% last year. This is largely a fixed-cost operation, and therefore as turnover increases, operating profit margins should further improve from their present 7% levels.
The City expects earnings per share of 4.2p for this year and 5.2p for March 2008, putting the shares on paltry price/earnings ratings of 9.3 and 7.5 times respectively. I believe that these forecasts could be exceeded – they certainly look very achievable in light of the encouraging second-half performance in 2006.
Recommendation: buy at 39p
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