Patsystems Share Discussion Threads

[bbd2] 16/8/2009 22:52

Midas Extra share tips: S&U and Patsystems

14 August 2009



Throughout the summer, stockmarkets have been characterised by push-me, pull-you behaviour. Confidence that the worst of the recession is behind us sends prices higher. Uninspiring economic data knocks them down again. This week was no exception.
Figures on the UK's trade deficit showed imports exceeding exports in June by £6.5 billion, a rather large number and higher than economists had been expecting. This was followed by data on unemployment and the Bank of England's thoughts about the future. The FTSE 100 index was unsettled and other indices reflected the general unease.


Patsystems


Back in February, Midas Extra recommended shares in Patsystems, a financial technology company which operates around the world. At the time the shares were 13.75p. Today they are 25p.

Patsystems allows traders to carry out complex financial deals electronically and links them to 60 exchanges around the world. The company also provides software for stock exchanges in places as far flung as Malaysia and Brazil, allowing them to interact with each other and with investors. Finally Patsystems provides risk software which allows banks to assess how much risk their traders are taking on at any given time.

The system is particularly useful because it provides live information throughout the working day so banks can stop their traders dealing if they feel they are taking on too much risk.

Patsystems has seen growing demand for its products, as banks, brokers, investment institutions and exchanges try to manage risk more efficiently and operate as cost-effectively as they can.

Interim figures to 30 June showed pre-tax profit up 82% to £725,000 and a dividend of 0.145p, compared to 0.126p last year. Analysts predict profits for the full year will rise 8% to £3.8 million, increasing to £4.8 million in 2010. The dividend is expected to grow steadily too, from 0.36p for 2008 to 0.42p this year and 0.48p next.

The company has cash in the bank and around 90% of its revenues are recurring, which means customers have signed contracts for at least the next 12 months.

Patsystems was founded in 1994 and floated five years later, riding the crest of the technology wave. But it foundered as the dot com bubble burst and its shares collapsed from 178p in 2000 to 3.5p in 2003.

Three years later, David Webber became chief executive – a successful entrepreneur who hopes to increase Patsystems' turnover from around £20 million now to £100 million over the next few years.

Midas verdict: Patsystems shares have almost doubled in six months and investors could certainly do worse than sell a third to a half of their holdings. But this is a company with a mission to grow. Do not sell out completely.

[max euwe] 08/8/2009 18:19

It is impossible to argue that Patsystems is not doing well, and with more growth expected in the emerging markets and Asia, we would expect the full-year results in six months' time to be equally good. True, the shares are not cheap, but even if the stock stagnates in the coming months, the dividend will more than compensate. Buy, reports the Independent.

[eacn] 05/8/2009 16:50

$20m - $30m would be between £11.8m and £17.7m at current $:£ rates.

If I remember correctly the company has the ability to enlarge the equity base by a further 10% without recourse to shareholders (the pre-emption rights waiver passed at the AGM), which at current market cap would generate c. £4.5M of cash or cash equivalent. Add in £7m of cash in hand and a further £2m of cash generated in the second half and you have c. £13.5m in the pot. With limited debt PTS could fund a £17.7m with only 10% dilution.

On that basis the company could proceed with an acquisition of this scale without shareholder approval (i.e. ION will probably not have a veto on this one).

[bbd2] 05/8/2009 14:04

Investors Chronicle:

Emerging markets drive Patsystems
Created: 5 August 2009 Written by: Malar Velaigam
Risk and trading software provider Patsystems saw sales climb as it secured deals for its trading and risk products in new emerging markets. With recurring revenues accounting for 95 per cent of group sales, and cash generation strong, the company increased its dividend again.

Sales from the trading systems business grew 15 per cent to £8.3m, and it celebrated first sales into Brazil and Malaysia. With connectivity into these regions now developed, chief executive David Webber is expecting to secure more clients there in the second half.

Revenues from risk systems were flat at £0.3m, although new deals with JP Morgan and Prudential Bache, won towards the end of the half year, are expected to bolster second-half sales. A new RiskAlert product - which looks at risk exposure before trades are made - has also been launched, and is expected to drive growth over the rest of the year.

Strong cash generation means the group is on the lookout for bolt-on acquisitions to add strength in Latin America and Asia Pacific, as well as new software and sales capabilities. Net cash inflow from operating activities rose from £977m in 2008 to £2.2m, which helped double the group's net cash position.

Broker Edison Investment Research expects normalised full year pre-tax profits of £3.8m, giving EPS of 1.9p, (2008: £3.5m/1.7p).

[eacn] 05/8/2009 09:12

interceptor2,

From the RNS it is evident that they are about to use some of the £7m cash pile (plus quite possibly shares) for an acquisition. They say that several targets are under consideration, but non has yet completed due diligence.

The RNS is effectively a trading update, which says that the Seymour Pierce numbers for the year will be met. The next announcement will probably be for an acquisition, with no further TU until the year end. Any acquisition will inevitably muddy the numbers for a while.

Webber has a reasonable track record on acquisitions, and now is not a bad time to buy, so I will be interested to see what they have in their sights.

[interceptor2] 05/8/2009 08:50

eacn

Thanks for the detailed write up, very impressive.

Looking at the EPS I had worked out that at 0.7p the full year should be inline with brokers estimate of 2p. So my feeling is that pts will struggle to break through 30p barrier, until we see a trading update with the words (exceeding expectations), which is possible at some stage. At 30p the per would be 15, which I can't see it breaking just yet.

I'm looking to buy in, but think it's prudent to wait for a trading update first.

[eacn] 05/8/2009 08:36

Decent numbers.

Revenue was 9,478k v. 8,255k H1 2008. H2 2008 was 11,372k i.e. 37.8% higher than in H1. If a similar hike occurred in 2009, H2 would be 13,057k and full year would be 22.5M (Seymour Pierce forecast is 21.5M). If they just repeat H2 2008 then full year will be 20.9M.

Since 95% of revenues are recurring you would expect an uplift in H2 and 21.5M looks do'able. The company says it is on course to meet expectations.
OP is up to 14.8% v. 9.9% for full year 2008. If this continues in H2 and the 21.5M turnover target is met then there will be 12M of turnover in H2 and an OP of 1.78M giving an annual OP of 3.185M. Seymour Pierce has a target for EBIT (excluding non cash items) of 3.9M.

Amortisation of intangible assets (which includes internally developed s/w) was 364k in H1 compared to 578k in H1 2008. Full year amortisation for 2008 was 1,014k. So assuming the same ratio full year amortisation in 2009 will be c. 639k. If this is added back into the OP of 3.185M (above) we get adjusted OP of 3.82M, which is very close to the Seymour Pierce target.

Since PTS is sitting on 7M of cash we can expect some interest. 49k in H1 with, say, a further 51k in H2. That pushes EBT ex amortisation to 3.92M versus a Seymour Pierce forecast of 4M.

EPS were 0.7p for H1 2009. In H2 2008 they were 0.5p on EBT of 2.17M. To make the Seymour Pierce target of 2p for the year would require 1.3p in H2 on EBT of 2.5M. This is a much better performance than in H2 2008 where EPS was pulled down due to a significant tax charge.

Assuming OP of 1.78M in H2 (see above) and interest of 0.51M we have EBT of 2.29M. If tax is 30% then we get a post tax number of 1.6M, which with 183M shares diluted (180M before dilutive effect of options) equates to 0.88p EPS or 1.58p for the full year. With tax at 20% we get 1p EPS in H2 and 1.7p EPS for the full year. If amortisation is ignored that generates a further 0.35p of EPS for the full year bringing the total into line with the Seymour Pierce target of 2p.

Having said that, the amortisation is in part for internally developed software (260k of the 364k), so a full add back of amortisation is not reasonable. Furthermore the P&L is flattered in H1 by 938k of gains on currency hedges (as the dollar has strengthened increasing dollar related revenues) offset by 472k of "other exchange gains and losses", making a net contribution of 466k versus 68k in H1 2008 and (205k) in 2008 as a whole.

Generally a strong dollar will help PTS and while not all of the current improvement in revenues can be put down to that it has had a significant effect. PTS mentions that they are intending to develop in Beijing so as to align costs to revenues, which could soften the effect of a weak dollar in future years ("An offshore development centre has been established in Beijing that will provide development capacity to support future growth plans and the flexibility to execute development work where it can most productively be executed").

Overall the business looks solid, with good cash generation and steady reliable growth. The deferred income position doesn't quite square with the claim that 95% of revenues are recurring (only 1,093 at end H1 2009 and only 2,281 at end H2 2008, when turnover is c. 20M annualised). The implication is that most recurring income is billed monthly even if it contracted on a longer term basis.

[dm1066] 05/8/2009 08:02

On first inspection the results look very strong. Not too many companies able to increase the dividend in these times.

[bg23] 31/7/2009 10:36

yes, thanks Gerard.
looks like i'll be logging in from the beach to check things out !

[gerardp] 31/7/2009 09:02

Last year's interim statement came out on the 6th August, so next week would be a good bet.

[bg23] 31/7/2009 08:38

looking pretty firm this morning. haven't found anything on the news services.

expectations of a resonable outlook and numbers?

anyone know when the statement is due?

[bg23] 28/7/2009 11:16

as at the 20th july, sharholding posted on the website =

ION Trading UK, Limited 52,851,191 29.24%
First Clearing, LLC 13,687,500 7.57%
Brewin Dolphin Limited 13,505,175 7.47%
Herald Investment Management Ltd. 9,900,000 5.48%
Sedaf Holdings SA 9,028,114 4.99%

the brandes holding has now been lodged at first clearing.

brewin have got their hands on 3.5 m and sedaf appear with 9m, whereas rathbones disappear.

given there has been no volume recently, i assume that someone has been switching their brokers around?

[eacn] 23/7/2009 11:57

I don't think numis currently cover PTS, so new 'insight' may be forthcoming.

My reading is that ION have no intention of making a move and that the Numis move may signl that Webber will be given the freedom to proceed with an acquisition, funded by means of a placing to institutions. Pure speculation of course, and probably wrong.

[bg23] 23/7/2009 07:48

i'd noticed a couple of weeks ago that numis had started making markets - mind you - given their price its obvious they don't want to trade - 3p wide and i don't think they've been on the bid or offer yet

the company has its 6 month numbers due early august, i hear that things are pretty bouyant, presumably last years signings starting to come on line. previous revenue increases have largely fallen to the bottom line, so hopefully the likelihood of improved margins.

also rumour of a possible exchange win, but, income from these seem to have a long tail from announcement

[eacn] 23/7/2009 07:17

Interesting change of adviser from Seymour Pierce to Numis.

A few years ago Numis were the broker to go to if you wanted to raise funds, that is if they would have you. Their ability to shift stock was second to none.

Whether that remains the case today, I couldn't say. However, they remain very well connected with institutions and I would regard this as a move up for PTS. It suggests that a placing and corporate action may be in the offing.

[bg23] 06/7/2009 13:11

generally i think things have held together pretty well given the backdrop, market and economy wise.

lets face it, if you are going to be anywhere, you'd be here or similar.

no debt, growing top & bottom line,dividend growth (albeit from a low level), increasing market requirement for your product.......etc

as an aside, not sure its relevant at the mo, but was told recently that panmure are ION's broker. can anyone confirm?

[eacn] 29/6/2009 17:55

It has felt like paint drying, but in my experience most successful investments feel that way.

[bg23] 29/6/2009 10:10

hadn't realised it, but we are approaching the year high for the stock. is it really a year ago that we were at 26p and above?

[eacn] 16/6/2009 09:11

The 33.35% do not form part of the free float, because they are not freely tradeable (since persons connected to the company are deemed to be barred from trading at certain times and in certain circumstances).

The institutional holdings do, however, form part of the free float.

In PTS's case institutions hold 87% of the free float, which is a large percentage.

[bg23] 15/6/2009 09:30

eacn,
the 33.35% of shares held by management, options, founders etc, are these assumed to be not tradeable?

also, if a private shareholder held shares for a certain time, 5 years or similar, is there a period when that holding would be deemed to be 'not available' or is included in the % listed above?

i only ask because the % seems very high. doubtless there are a number of shareholders who have had an interest for a considerable time, and there are considerable holdings vis the founders, but i'm surprised by the idea of just a 8 or 9% effective freefloat of equity !

bbd2, i echo your thoughts re the share price, but would rather a take out, at least i would feel i was going to receive a fair price for the stock rather than a price created in an relatively unknown and under-researched company/sector.

[eacn] 12/6/2009 20:25

Which means that anyone trying to accumulate stock can only really do so by buying from institutions or persons connected with the company.

[eacn] 12/6/2009 20:24

bg23,

management, share options for staff, founder shareholders etc. hold 33.35%. Institutions hold 58.39%. The rest is with PIs.