Shares digital

Its strategy, chairman and cash promise much from the IT services specialist

by Russ Mould

Business Systems Group (BSG:AIM) 13p

Stop Loss 10.5p

Shares summary

A lowly valuation and net cash balance sheet provide the basis for a potential turnaround story, which could be accelerated by the arrival of a new non-executive chairman.

Business: IT services expert

Vital stats:

Market value: £10 million

Historic PE: n/a

Prospective PE March 2008: 17.3

Prospective PE March 2009: n/a

Sector PE (next 12 months): 17.3

1-month relative strength: -6%

1-year relative strength: 28.2%

Yield 2008: n/a

NMS: 3,000

Spread: 7.4%

A lowly valuation, a clear strategy to boost profits and the arrival of a new chairman with an excellent track record of value creation all suggest Business Systems Group (BSG) is worth a high-risk punt.

Group strategy is based on winning managed service contracts, where BSG takes responsibility for a customer’s specified IT services needs and delivers them on an outsourced basis. Service desk, maintenance and data centre operation are often bundled together as part of multi-year deals, which are delivered remotely via BSG’s own data centre or by DSG accessing the client’s own facilities.

November’s interims revealed managed services already generate a third of group sales and more than 40% of gross profits.

Contractual revenues from long-term deals have reached £7.9 million on an annualised basis, or around a quarter of group sales. Group earnings visibility is therefore improving, as it needs to after January 2006’s profit warning, when real estate management firm Mapeley chose not to renew a contract worth £2 million a year in sales. This forced BSG into loss, caused the share price to plunge and prompted management to cancel dividend payments.

Management’s goal is to generate half the group’s gross profit from managed services and thus cover all the firm’s fixed costs. This would provide protection against volatile trading at the Hardware arm, which supplies product from the likes of HP, IBM and Cisco in a mature and competitive marketplace.

An economic downturn would be a threat, as the 2001-2003 slowdown revealed corporations can be quick to cut IT spending if needs must. The applications arm, which develops and supports software applications for customers, also faces the challenge posed by offshoring – although an extensive restructuring here in March 2006 has bolstered profitability.

Rising power prices are a threat, as BSG plans to expand its data centre capability. Existing data centre deals must also be renegotiated this year. Overheads are likely to rise and second-half profits may therefore not show the first period’s progress, in which pre-tax earnings jumped from a loss of £344,000 to a profit of £465,000.

A limited free float of around 25% is also less than ideal. Yet all these issues are largely discounted by a lowly valuation. BSG’s £10 million market cap is underpinned by a £7 million cash pile, so investors are in effect paying just £3 million for the firm’s £32 million of annual sales. Tax losses of £4.9 million are a further plus.

March’s arrival of Vin Murria as non-executive chairman suggests that moves to crystallise that lowly valuation could be imminent. Murria has over 20 years’ IT industry experience, with both private equity and publicly listed firms. Her most recent success was as chief executive of Computer Software Group. Some 13 acquisitions supplemented good organic growth between 2003 and 2006, during which time the firm’s share price rose from 40p to 150p before it was taken private in May 2007, merged with IRIS in July 2007 and was finally sold to Hellman Friedman for $1 billion.