Woking-based Fidessa (FDSA) is a global leader in trading software systems to financial institutions, has a customer base spread across the four corners of the globe and 86% recurring revenues, underpinning its fine cash generation reputation. It is good at what it does.

But the questions investors should be asking remain the same as they have for several years; is there any hope of returning to past growth glories, and how does the share price continue to defy gravity.

Most recent half year figures to 30 June show 4% underlying growth in revenues and operating profit, once the effects of currency fluctuations is stripped out. This is not new. The UK fintech businesses has been putting up low to mid-single digit growth for years now.

aaaFDSA figs

Pre-tax profits are anticipated at £43.9 million this full year, according to Numis number crunching, and if it gets that it would imply less than 3.5% progress since 2011's £42.45 million mark. Profits have largely stagnated throughout that period.

In response, management has invested wisely, developing its equities platform of choice for many of the smaller and medium-sized investment banks and trading houses, and to some extent, defying critics in the derivatives space, making decent progress in the CFDs, options and futures area.

Bulls point to a swathe of new banking and financial market regulations being pushed through by watchdogs, the company itself talking up incoming MiFID II regulations which it hopes will forec institutions to spend more on compliance-friendly automated trading software. But the dilemma facing the company is that clients may face pressure on profit margins from new red tape, potentially sparking another round of business failures and consolidation, shrinking Fidessa's addressable market. It's happened before, most notably in the global financial crisis of 2009/2010, and it's still happening here and there.

Trading software 2

'Fidessa expects sell-side derivatives revenue will grow for the year as a whole but at a much reduced level due to the drag effect of the closure of Jefferies group's Bache futures unit,' says Fidessa today. Interestingly, end user numbers continue to mark time, at around the 23,000 mark where its been for quite a while.

Yet the share price has rallied strongly since the year-to-date low point of £17.71 in February, hitting £25.50 now after today's 4.5% spike. That's their highest since April 2014. It also leaves the stock trading on a year end 2017 price to earnings (PE) multiple in excess of 28-times. Forecasts already call for 5% earnings growth this year and more than 10% next despite the limited evidence that growth can be accelerated at Fidessa.


True, the company normally has pretty sturdy cash flow, an area that is a little weak in this six months based on typical dynamics, but the income yield is 3.6% for this year, good but not amazing. Compared to similarly cash generative and payout friendly peers, Micro Focus (MCRO), say. Not a comparable business in ternms of operations but a mature UK techy too, yet it's stock trades on a mid-teens PE. Quite where the Fidessa premium comes from remains a mystery.

Issue Date: 01 Aug 2016