UK market undervalues smaller quoted information technology companies
In the UK, large information technology companies are over-valued by the market compared with the smaller concerns that are outperforming them, a survey by information technology financial advisers Broadview Associates suggests. The Broadview UK Barometer showed telecommunications to be the leading industry sector with, as should be no surprise, software and services growing and hardware in decline. The information technology industry as a whole was seen to lag behind other industries, a trend which, Broadview suggests, is largely driven by the depressed hardware sector. The conclusions were drawn from the analysis of the latest audited final year results and share prices from some 127 publicly listed information technology companies, as they stood on January 21 1993. Public market data along with Broadview’s own database provided the source figures. Broadview defined information technology companies as those organisations deriving at least 50% of their revenues from computer and/or telecommunications hardware, software and services, excluding those with under UKP1m turnover. The 127 were then divided into three sectors: information services, telecommunications services and hardware. Of the total, 42 firms were defined as ‘information services’ operations and were further subdivided into the following segments: software; services; and multiple services – a combination of both. And 30 of them had turnover of below UKP35m. Another 79 were classified as hardware companies, spread across the following areas: application hardware manufacture; communications – production of networking and transmission equipment; components manufacturers; computer vendors; hardware, software and value added distributors; peripherals manufacturers. Of these, the Communications hardware and Computer segments were not considered to have comprised enough companies to justify. Of the 79, 35 had turnover of below UKP35m. The remaining six telecommunications services companies, all of which had over UKP35m revenues, were not subdivided. Each sector and the separate segments were then analysed according to performance – pre-tax and turnover – and market valuation. This was based on net price to earnings ratios and total market capitalisation – equity market value plus total debt, less cash, to turnover ratios. Median values were then quoted in each case.
Trading performances belie relative market valuations
Despite the fact that small companies promise substantially faster growth, the survey revealed that for large companies the median price to earnings ratio was a heady 20.6, compared with 15.4 for smaller firms. The median total market capitalisation to turnover ratio was also higher for larger companies at 0.96, against 0.81 for smaller ones. But those companies with over UKP35m annual revenues saw a zero increase in turnover with an average 5.8% rise in pre-tax margins last year, while those with under UKP35m revenues, grew their turnover by an average of 4%, with pre-tax margins up 7.2%.
Putting figures to the faces
The largest information technology companies were primarily telecommunications and hardware companies, and were listed as follows:
Company Name Annual Turnover (UKPm)
British Telecom UKP13,337 GEC UKP 5,774 BICC UKP 3,452 Cable & Wireless UKP 3,176 Racal Electronics UKP 1,810 Reuters Holdings UKP 1,467 Gestetner UKP 898 Vodafone UKP 585 Securicor Group UKP 565 Security Services UKP 511
The strongest year to year turnover growth was seen among the following hardware and information services companies:
Company Turnover Turnover UKPm growth (%)
Gresham Telecomputing 6 200 Lynx Holdings 7 84 Druck Holdings 27 60 Microvitec 37 57 Instem 16 42 Oceonics Group 29 42 Molynx 22 41 Densitron International 36 39 Total Systems 3 37 Sage Group 27 36
The highest pre-tax margins were achieved by the following firms, spanning all sectors:
Company Pre-tax Margin % Sector
Vodafone 46 T Macro 4 46 IS Micro Focus 33 IS Sage Group 33 IS Barbour Index 31 IS CML Microsyst
ems 30 HW Southern Business Group 28 HW Total Systems 27 IS Blick 27 HW MTL Instruments 26 HW
Of all the sectors, Telecommunications was the most highly valued with a 25.5 price to earnings ratio and 1.57 total market capitalisation to turnover ratio. Hardware yielded a price to earnings ratio of 17.9, above Information Services at 16.5, but had the lowest total market capitalisation to turnover ratio of 0.77, below Information Services at 1.15. Growth in the Information Services sector, which Broadview noted to be stabilising and benefitting from the cost cutting implemented in 1991/2, was driven primarily by the Software and Services segments. Software achieved the best pre-tax margin growth rate – 18.2% followed by Services at 12.6% and Multiple Services at 5.6%. Services had the best turnover growth of 8.3%, followed by Software at 5.1% and Multiple Services at 4.4%. Services was also the the most highly valued segment, sporting an 18.2 price to earnings ratio.
