Software Circle Share Discussion Threads

[muxdapanza] 01/9/2008 14:46

The business of the Group continues to progress and the Board will provide an update on trading within the upcoming interim results.

Anyone know when the interims are out? 'ish

[arthurly] 01/9/2008 14:36

I was aware of the action but thought it may have just fizzled away. Appears as if the directors will cough up for any loss by the company.

[siwel100] 01/9/2008 08:46

With the £ now falling so fast against the Yuan and the $, combined with Darling's pearls of wisdom about the appalling state of the uk economy, perhaps not suprising that cash rich and divi paying Chinese stocks like SFT are taking on defensive qualities. It should be an interesting Autumn as the market returns from holiday slumbers.
imo

[theblackswan] 27/8/2008 08:18

It was about 0.3% dont knock it, its not often an aim company this small pays a dividend. huge potential here me thinks.

[zimbi] 26/8/2008 20:04

What value is the divi?

[siwel100] 26/8/2008 16:51

bardfield.... yep if SFT just stoodstill then we are looking at 20%+ increase in the cashpile AND earnings simply on £ depreciation against the Yuan and $ over the next 12 months. Then add growth on top plus the opportunities presented by the cashpile and it makes a very cheap hold where they also pay us a divi just for being patient :)
Its interesting to see just how many of the Chinese stocks have bounced recently. The Olympics demonstrated in a very visible way the power and growth of the Chinese economy. I fully expect Chinese stocks to reach new highs over the next 12 months.
imo

[bardfield1] 26/8/2008 14:56

Siwell been contemplating your currency hedging point: now the pound is down to almost $1.8 the $18m cash in SFT is now worth £10m rather than the £9m a month ago t UK investors. Strip out the cash and market cap is about £6m, with profit about £3m - gives a p/e of 2. (I know you said this a few days ago but i only just got there)
Top up time I think !

[igoe104] 26/8/2008 13:29

OUTSOURCING IN CHINA.

[siwel100] 26/8/2008 10:21

"China software industry's annual output value topped 583.4 billion yuan in 2007, making it the world's fourth largest software producer. The country's share of the global software market rose to 8.7 percent in 2007 from 1.2 percent in 2000, with an annual growth rate of more than 30 percent.


The country exported $4.12 billion worth of software in the first five months of this year, up 45 percent year-on-year. Software exports grew swiftly from $720 million in 2001 to $10.24 billion in 2007."

[siwel100] 23/8/2008 20:46

Orb1t...If SFT is not for you then fine, personally I prefer the far larger cash pile with SFT, the high margin contracts, the fact it can afford to pay a divi which means I am paid for the hold while I wait for a full revaluation, that they work with the National government and have a national contract, that they are diverse into the commercial contracts as well...and that they are very cheap.....But if its not for you then I wish you luck with CESG and I hope it does ok for you.

[0rb1t] 23/8/2008 17:52

I have investigated further and here are some new points:

1) Track record - CESG was founded out of the in-house IT department of ZRCC that is part of Sinopec. Therefore the company was successfully providing IT services a long time before 2003 when the China Eastsea group was formed.

2) Enterprise p/e - If you remove exceptionals and interest payments received you get a net profit of £1.4m for SFT against a EV of £6.93. This equates to a EV/E of 4.95 which is not that different from CESG's of 4.92. Also CESG has net trade receivables of £5.4 as opposed to SFT's £3.5m. If these were taken into account then CESG's EV/E value would be lower.

3) Margins - Gross profit margins at SFT are slightly overstated as they include the VAT rebate in the turnover figure. They are still higher at 66% compared to CESG's of 46%. But if you look at the Profit after tax (excluding exceptionals) SFT's margin is then 26.4% compared to CESG's of 31.4%.

4) Dividends - SFT does pay a dividend which is good but it does ask the question that shouldn't they be using their cash for expanding their business.

5) Work mix - The main difference between the two companies is the work mix. CESG's is predominatly industry based (ie petroleum, power, telecoms) where as SFT is government based. One of Warren Buffet's rules is not to invest in companies that rely on government spending as your company's fate is then in the hands of the government.

6) Risks

a) SAT project - The amount of customistation for each provence could be understated. They say that 90% can be reused and only 10% needs to be modified. Quite often in IT that last 10% takes the most effort!

b) Equity exposure - SFT appears to be investing the spare cash in listed companies in China. This has lead to one-off gains which have not been treated as exceptionals. This year their headline profit could go down if they do not repeat their investment success. Even worse investment losses could affect the group profits.

7) Future prospects - SFT could be successful as they have opened their Beijing office and are winning outsourcing contracts. They are still priced cheaply. CESG could encounter problems from expanding too fast but their strategic direction so far seems to be good. IMO.

[siwel100] 23/8/2008 14:29

Orb1t....They are simply very different. CESG was launched 5 years ago, SFT has traded profitably for 10 years.... CESG has £4m cash, SFT has £9m cash... CESG doesnt pay a Divi, SFT does...CESG includes a lot of low margin outsourcing work, SFT's gross margin is 68%...Strip the cash away and SFT is currently on an enterprise p/e of 2, CESG is 5.
Both companies are earning in a strong currency which hedges against the £. Both companies are in an economy looking to maintain growth through the cycle. Both companies are reasonably diverse although I do like the National Government contract that SFT has.
Its not a case of knocking either company as both look set for good growth in the coming years, more a case of personal investment preferences. Some will hold one, some the other and some will hold both.

[0rb1t] 23/8/2008 09:20

The fact that they are in different locations would make them a suitable take over target. It would enable CESG to extend its branch network where it could resell all its other software solutions. But there must be 1000's of IT companies that CESG could potentially be looking to acquire so the chances of it being Sinosoft are probably slim. CESG has an advantage as they have a longer proven track record with a more diverse IT offering.

[siwel100] 22/8/2008 23:21

Capt Bligh...No chance of any merger between the two companies. They are two very different business's, in different sectors and different locations. China is unlike the UK or any mature market. The potential to expand through buying unlisted companies cheaply is huge. There is no commercial sense for either party to consider a merger.
Personally I prefer SFT with its exceptional margins and the major cash pile available to accelerate growth without dilution. But CESG also has potential. They are simply different horses on different courses.

[samckay] 22/8/2008 21:46

I hope not stluke. For longterm investors in small companies with potential, a takeover is a bad thing. The potential is lost as the company is swallowed up into multi-layers of management and paperwork where the capability for innovation and flexibility are lost. The buyer usually uses debt or additional shares to finance the takeover so everybody loses out. Not for me thanks. I prefer Sinosoft to grow exponentially as an independent company. That's what I invested in.

[stluke] 22/8/2008 10:06

I like the sound of that last bit capt bligh, i get the feeling CESG would like to make some acquisitions.

[capt bligh] 22/8/2008 09:44

Siwel u should also subtract interest earned on the cashpile from the profit when calculating true enterprise pe. likewise interest paid for a company with debt. If you like these kind of sums have a look at BILL where there is a very low market cap a lot of debt but fantastic cashflow.
PS surely a sft/cesg merger.

[butch9850] 22/8/2008 09:14

breAKOUT could be soon.

[explorer88] 21/8/2008 23:17

lewis - great post ! (203)

[siwel100] 21/8/2008 22:11

borchardt....To get to real value you always strip the cash then calculate the price being placed on the business itself. So SFT's business is currently valued at 15.7m minus the 9m cashpile which gives just 6.7m, then calculate the p/e from there. To work out what the market cap would be at higher p/e's just calculate profit against the figure you want then add the cash back on top. Cash itself should always be treated as neutral until put to work through organic growth or aquisition.
Its amazing how often people overlook the balance sheet when looking at value. Cash piles like SFT's just leads to missed opportunities but the most dangerous is when people ignore debt. A company with 1m profit and 2m market cap may look great until you realise its got a 15m debt so the real p/e is huge and they will struggle to pay the interest.You see posters on threads like that scratching their heads and wondering why others dont see the "great opportunity". Always remember to subtract cashpiles but add on debt burdens.

[martke] 21/8/2008 21:39

borchart.-SFT had cash in dollars equivalant to 5 to 6 pence per share in the last accounts. Deduct this from the share price gave the low pe price for the business.

[borchardt] 21/8/2008 20:07

siwell100 - post 197 -Can you explain your p/e calculations. If approx price yesterday 9p gives p/e of 2 how would a price of 15p give a p/e of 6 and so on.
Am I missing something?

[igoe104] 21/8/2008 13:33

Interim results should be out mid-late september, so we could well see a big move in the share price soon.

[siwel100] 21/8/2008 11:42

bardfield...Yep hedging against a weak £ is going to be an important issue when considering investments over the next few years. Up there with avoiding companies with debt and seeking out those with earnings from countries likely to remain in growth through the economic cycle.
Yep good management, strong products, clean financials are always the bedrock but its a damn site easier for companies in clear air to prosper than those facing thunderclouds. The market always adjusts eventually, only needs some patience.
SFT with goverment earnings, Yuan based cashflow , growth potential and Divi payments is currently priced as a leper, but in fact it has the criteria for premium rating.....the market is often slow but never stupid. Just a case of waiting for the correction and re rating.

[bardfield1] 21/8/2008 10:50

Nice post siwel
Hadn't considered the currency hedging aspect.