Now, how to profit from Microsoft’s entry into the ERP market (see Turkey of the week: losing out to Microsoft)? A few days after my ‘eureka’ moment, I read an article in Shares magazine about Touchstone Group (TSE). This company looks to be an ideal beneficiary of Microsoft Dynamics’s aggressive push into the UK.
Tip of the week: Touchstone (TSE: Aim, 157p), tipped as a BUY by Shares magazine
Touchstone provides software and consultancy for medium-sized firms such as Speedy Hire (and the Isle of Man Government). This involves supplying the expertise for these organisations to install and run ERP software. Touchstone stands out because it has invested significant funds in building up its skills. These account for more than 50% (or £11.5m) of turnover (£23.1m), which is up 47% in the past year alone.
To its credit, the company’s management recognised this trend some time ago. Back in March 2004, they acquired Multi Group for £725,000, which at the time was one of the UK’s leading consultants for Microsoft business software. Since then, Touchstone has invested heavily in this product and is presently Microsoft’s largest Microsoft Dynamics partner in the UK, with 720 clients. Indeed, last year TSE won 77 new customers, 60% of whom selected solutions based upon Microsoft Dynamics’s technology. Clearly, recruitment costs will impact on profits margins in the short term, but I expect that revenues will catch up quickly.
So what about the financials? In the 12 months to March 2006, organic growth was an impressive 29%, with pre-goodwill earnings per share increasing 149% from 6.3p to 15.7p. City consensus is that earnings per share will increase further to 17.7p and 21.0p respectively for this year and next. This puts the shares on p/e ratings of eight and seven, which offers excellent value. The balance sheet is also strong, with net funds of £3.1m, enabling Touchstone to pay a 4p dividend last year.
Other than its relatively small size, the only downside is if, due to their concerns over the state of the economy, companies decide to postpone their ERP investments, which would hit IT consultants such as Touchstone. But this risk should be mitigated by Microsoft’s brutal undercutting of its competitors on price. And management is upbeat. On Wednesday, David Thompson, the chairman, said:“Turnover in the first four months had increased by nearly 38% compared to last year, and the board believe the company is in a good position to meet market expectations”.
Finally, it’s worth noting that Thompson founded Druid, one of the first IT companies to specialise in implementing SAP’s ERP software back in the early 1990s. He later sold Druid to Xansa in March 2000 for £750m. Clearly, he knows what he is doing.
Recomendation: BUY at 157p (market cap £18m)
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