EGS

Higher sales and good cost control help to improve the software vendor’s outlook

by Russ Mould

A second consecutive trading statement indicating results will meet market expectations should continue the recovery in shares of eg solutions (EGS:AIM). The firm is battling to recover from a wretched run in 2006 and 2007, which saw the stock collapse from 168p to last autumn’s low of 10p.

In a welcome improvement from the past two years – which saw the firm suffer project modifications, adjustments to its revenue recognition and the departure of a chief financial officer – eg solutions’ update revealed interim sales rose 11% as expected. Better still, good cost control has boosted an improvement in earnings, compared with last year’s first-half pre-tax loss of £680,000. The vendor of software which improves clients’ operational performance lost £815,000 in the whole of the prior financial year.

Director buying in June had hinted at a turnaround in fortunes. Leading shareholder and company founder Elizabeth Gooch bought 179,412 shares at 12p each to take her stake to 64.2%, while non-executive chairman Rodney Baker-Bates increased his holding by two-thirds, to 5.4% of the capital, at the same price.

Depressed earnings in 2008 leave eg solutions on a lofty prospective PE ratio of 25.5. Yet even after recent run back to the 28p level, a market cap of £4 million still compares with sales forecasts of £4.8 million for this year and a year-end cash balance of £878,000 – meaning the underlying business is valued at just £3.1 million, or 0.65 times sales.

Shares says: Limited free float is a negative but the valuation could prove too lowly given the recovery potential. Buy