Shares digital

Anite (AIE) – 40p, stop loss 32p

SHARES SUMMARY

Break-up speculation and consolidation in the local government IT services area are both potential catalysts for a share price mired near four-year lows.

Business:

Provides IT solutions to telecom and travel industries, as well as government and public sector organisations

Vital stats:

Market value: £139 million

Historic PE 2007: 6.9

Prospective PE 2008: 7.8

Prospective PE 2009: 6.6

Sector PE (next 12 months): 27

1-month relative strength: 5.4%

1-year relative strength: -44.9%

Yield 2008: 2%

NMS: 6,250

Spread: 1.2%

Imagine a situation where a new management team arrives at a company, refocuses the business, bolsters the balance sheet, re-initiates dividend payments, launches value-adding share buybacks and hints at a final break-up of the firm. Better still, the valuation is cheaper now than it was before the new broom swept in, as profits are up yet the share price is lower. Interested? In which case Anite is the stock for you.

Steve Rowley arrived as chief executive officer at Anite in November 2003. His first job, alongside chief financial officer Christopher Humphrey, who had joined nine months previously, was to clean up the mess left by the previous regime, which had seen the Slough firm spend around £300 million on over 30 acquisitions in a six-year period.

A number of units, including Space, Datavance and Calculus, as well as operations in Germany, Austria and the Netherlands were sold off, raising over £30 million. Anite also extricated itself from a disastrous government IT services deal in Australia and derisked another deal poorly handled by the prior team, the UK’s Pericles e-government project.

Profit warnings in October 2005 and April 2006 showed more had to be done, even though the disposals had left Anite with net cash, which was used in 2006 to pay a first dividend in five years and launch a share buyback.

Rowley then moved on to the second part of the turnaround, as the group focussed on three divisions: wireless telecoms, travel and public sector. Over £60 million was spent acquiring Nemo and Invenova to establish Anite as a global player in the telecoms testing arena. Research spend was ramped up at telecoms and travel, where the @com online reservation system swiftly won over the likes of TUI and First Choice.

After good early progress, surprise profit alerts followed in September and November of 2007, as the mobile handset testing business encountered an unexpected speed bump, caused by delays in orders for 3G and 4G testing equipment and weakness in Korea and Japan.

These setbacks have driven Anite’s share price down to 40p, below the 48p level seen when Rowley took the helm, even though pre-tax income for the year ending April 2008 is expected to be near £25 million, compared with £12.4 million on an adjusted basis in 2004.

More intriguingly, Rowley hinted at a new, third stage to the restructuring last December, saying he wants to address ‘a stock market valuation that reflects a structural discount.’ The group’s three-legged structure could therefore finally be broken up this year, particularly as Rowley has admitted in the past to Shares (19 July ’07) there is no synergy between the £155 million cap’s three units.

Wireless looks the most likely unit to stay, and a private equity bid for Northgate Information Solutions (NIS) and Civica’s (CIV:AIM) publicly stated desire to acquire both indicate there is potential for action on the public sector front at the very least.

There are risks. Small caps remain out of favour, renewed dollar weakness would be a nuisance and further acquisitions are also possible as the portfolio is refined further. Profit warnings also tend to come in threes, and public sector rival IBS OPENSystems (OPN:AIM) issued a profit alert last week. Yet a lot of bad news is now in the price and the stock would look undervalued if management start the hoped-for break up.

by: Russ Mould