The flurry of buying activity around the shares of Atlantic Computers Plc last week just underlines the chronic tendency to undervalue the major computer leasing firms on the UK stock market. Despite the mixed fortunes of last year at both United Leasing and IBL, what most analysts seem to ignore is the vibrantly healthy state of the market for leasing new and second-hand large system IBM-built computers and peripherals. There is a simplistic logic going around that says that an IBM lessor can’t do well in a market where IBM itself is not doing well. Not so. The other argument is that when IBM is doing well it is beating the leasing companies to the business. Also not true. Around the globe something like 40% of the world’s IBM mainframes are in place due to some kind of independent leasing contract. All of the second-hand ones and a percentage of the new systems sales. Growth of the computer power needed to fuel bigger and better software applications in the Fortune 500 and Times 100 companies doesn’t stop just because IBM has messed up its pricing on the 3090. That power comes from the second-hand market. Every three years or so the leasing community is faced with a change of equation from IBM. If it can absorb the shock of the next generation from IBM in the first six months of its life, it is safe for another three years. During the next few months that challenge is about to be issue once more from IBM. A new upgrade for the 3090 mainframe is due to appear any week now, and the betting is on 15% to 20% throughput improvement for something like a 5% increase in price. And after five years of IBM watchers speculating about it, IBM is finally expected to come out with faster channels. These channels will give an enormous boost to IBM’s figures because of the new disk business, and depending on the price, so will the new processor. But that means that the leasing companies will be called upon to provide finance to help companies pay for these new goodies. Sure, the residual value of the 3090 will be hit, but by about the amount of money that it will cost to upgrade a 3090 to this new model level of power. But that’s not a problem: a 3090 on most company’s books is valued well below the new price low that a new machine will establish. Fresh placement activity will switch smoothly from the 3090 to the 3090 Plus (probably will be called the 3090X) and second-hand activity will start on the 3090, and gradually take over from the still lucrative previous generation 3081 and 3084. Atlantic’s share price rose 8% on the week, and has added another two or three pence this week to settle at 340 pence, which represents some considerable buying, and possibly the prospect of more of the same.
No bad news
All of the movement seems to be explained away by the fact that the leasing and telecommunications group is on target for its broker’s prediction of UKP21m pre-tax, and that there is no ‘bad’ news to accompany it. With a handful of board changes over the past weeks, mostly to the telecommunications subsidiary Lion Systems Development, there may have been some worry that there would be some bad news wrapped up in the figures when they come. That worry, if it ever existed, seems to have been forgotten now. A circular from Atlantic’s broker, Sheppards & Chase seems to have sparked much of the buying, but we can’t view it as any kind of surprise. All of the computer leasing news and figures that have seen the light of day in the past six months have shown nothing but good-sounding news, and everyone has been racing to upgrade their profit forecasts. A price-earnings ratio is taken to represent the collective market view of potential profit growth, and the glut of business out there at the moment, too big for any one of them to handle on its own, promises to bring a review of the sick ratings currently endured by Atlantic, United and IBL. Comcap and Dataserv have slipped the leash, Comcap diversifying into property, Dataserv on its way to BellSouth Corp, and traded up to about 13 times earnings, so in the absence of any more overambiti
ous mismanagement, the multiples of the surviving three independents should reach the same level over the next 12 months. And that will mean share prices almost doubling. – Peter White.