Small software and services companies appear to be most undervalued
The disparity between different sized companies mentioned opposite was found to be more pronounced in the software and services sector than for hardware companies. The price-earnings ratio for the larger software companies was 24.7 against just 15.1 for smaller companies, while total market capitalisation to turnover came in at 1.24 for large and 1.11 for small companies. The price-earnings ratio for larger hardware companies was 19.7 compared with 16.5 for the smaller firms, with total market capitalisation to turnover ratio almost even at 0.73 against 0.78. This is probably explained by the largely commodity-based nature of many hardware businesses, which tends to blur the differences between large and small companies, say Broadview’s researchers.
Annus Horribilis? 1992 was certainly not a very good year
Predictably, the survey showed 1992 to have been a flat year for the UK’s information technology businesses. The cumulative turnover, including figures from British Telecommunications Plc, rose just 0.3% to UKP39,200m, with the total equity market value standing at UKP59,800m. Information Services, including Reuters Holdings Plc, saw 5.5% cumulative annual turnover growth to UKP3,100m. Hardware, meantime, saw revenues decline 4.7% to UKP17,900m. When compared with Financial Times-Stock Exchange FTSE 100 companies, excluding figures from banks and insurance firms, information technology was seen to be lagging behind with flat 1.4% annual turnover growth 4% compared with the FTSE median of 5.2%. Pre-tax margins also trailed at a median 6.4% rate against the FTSE’s 11.1%. Of the three information technology sectors telecommunications services was pack leader with 7.7% turnover growth and 13.1% median pre-tax growth. Next in line was information services with 6.4% median turnover growth and 12.3% pre-tax growth. Hardware faltered in last place with median annual turnover having dwindled 3.1% and below average pre-tax growth of 5.4%, but the companies in the hardware sector that survived the 1980s bubble are more soundly based.
UK services companies seem to be valued more highly than their US siblings
According to Broadview, services companies in the UK tend to be more highly valued than their US counterparts, partly because of the greater demand for bespoke development here. A clear split between high value added services providers and so-called body shops was noted within the services segment. In keeping with the general trend, the larger services companies were seen to have underperformed compared to smaller ones. Turnover growth came out at only 3.5%, against 8.2% for smaller companies; pre-tax margins were 5.7% against a healthy 12.9% for smaller companies. But again larger concerns generated higher market valuations – the median price to earnings ratio was 24.7 against 15.1 for smaller firms. The total market capitalisation to turnover ratio for larger companies was 1.24 against 1.11 for smaller ones.
Mixed fortunes seen among the industry’s top ten companies
The top ten largest information services companies reported mixed fortunes. For instance ACT Group, in fourth position, and Micro Focus, in ninth position, achieved around 20% turnover growth. Cray Electronics in fifth position saw a 21% decline in turnover. Reuters Holdings had the largest turnover, up 7% at UKP1,467m. The strongest turnover growth was reported by Gresham Telecomputing, up 200% to UKP6m; Lynx, up 84% to UKP7m; Instem up 42% at UKP16m; Sage Group up 36% at UKP27m and Kewill Systems up 34% to UKP42m. The weakest performers were Pegasus Group with turnover down 35% to UKP9m and BBB Design where revenues fell 34% to UKP2m. The Information Service companies that reported the highest pre-tax margins were Macro 4 at 46%; Micro Focus and Sage Group level at 33%; Barbour Index at 31% and Total Systems 27%.
Sheep and goats of the hardware world: specialised versus commodity
Within the Hardware sector a clear divide was noted between specialised and commodity manufacturers,
as reflected in both performance and valuation statistics. Bolstering the otherwise flagging figures was the Application Hardware segment that achieved 8.6% pre-tax growth and 1.9%. turnover growth. Valuations for this segment were similar to that of the IS sector at 1.1 total market capital to turnover, and 18.8 price to earnings.
Distribution is top of the tree for growth while peripherals perish
The best annual turnover growth was achieved by Distribution at 2.7% while Components declined 3.6% and Peripherals sank 9.2%. After Application Hardware, Distribution had the best pre-tax margins of 5.0% followed by Peripherals at 3.6% and Components at 2.3%.Distribution had the highest price to earnings valuation of 20.1 followed by Components at 19.2, Application Hardware at 18.8 and Peripherals at 7.3. It was noted that the price-earnings ratios rose significantly as growth rates increased in the Hardware sector.
Hardware comes top, peripherals bottom on market cap to sales ratio
Comparison of market capitalisation to turnover ratios saw Application Hardware with 1.1; Components with 0.63; Distribution with 0.38; and Peripherals with 0.31. The difference in performance between large and small hardware firms was less marked than for the other sectors. The median decline in turnover for larger companies was 3.1% against 2.8% for smaller ones; pre-tax margins were 5.7% for larger companies, 5.4% for smaller ones. Most of the top 10 hardware companies suffered from the recession. The only ones to see growth were Gestetner with turnover up 4% to UKP898 and De La Rue up 12% to UKP415. The strongest growth in turnover came from Druck Holdings, up 60% at UKP27m; Microvitec up 57% to UKP37m; Oceonics Group, up 42% at UKP29m; Molynx, up 41% at UKP22m; and Densitron International up 39% at UKP36m. – Lynn Stratton
