Shares in Fidessa (FDSA) leapt 9% on Monday thanks to a full year 2017 beat on profits and hints that investors can expect profit margins to strengthen further down the line.
That’s an impressive surge for a FTSE 250 company that at £28.35 per share, values the business at just shy of £1.1bn. This rally is not in isolation either. The stock has advanced 30% since 6 February, including today’s run higher.
The results show adjusted operating profit increased 10% to £54.3m last year, substantially beating the £49.7m pencilled in by the market. Revenue rose 7% but that growth was flattered by currency oscillations. Stripping out FX movements and we’re looking at a more modest 3% improvement on sales, hardly something to write home about.
WHAT DOES FIDESSA DO?
Fidessa is a global leader in trading software systems and data to financial institutions. It runs two units.
Sell side provides solutions and tools to support cash equities and derivatives trading around the world. The buy side arm supplies systems that cover all stages of the investment process, for all asset classes.
‘Fidessa's prelims are 5% to 10% ahead of our expectations (with beats on all major lines) led by margin outperformance,’ say analysts at Numis Securities today.
But they also flag indications that margins may improve further from full year 2019, and point jumped on by Jefferies’ analysts too. In a note entitled ‘Margins on an Upward Trend’, the Jefferies number crunchers also upgraded the stock from a fence-sitting hold to a full out buy.
Yet equity researchers remain hugely split. Consensus currently shows two brokers with buys on the stock, a holder, and five others that say sell.
ARE INVESTORS GETTING TOO CARRIED AWAY?
This is because, despite the implied growth that’s supposed to flow through from increasing regulation of global financial markets (Mifid II was introduced from January, for example), Fidessa remains a relatively low growth story, as Shares has previously explained.
It also seems an unlikely buyout target for private equity or trade consolidators.
True, this is a high-quality business with super reliable cash performance and a bullet-proof balance sheet, yet the stock is now trading on a price to earnings multiple of about 30-times for 2018.
Recurring revenues run at around the 90% mark and the business has £92.4m of net cash on its books as of 31 December 2017.
Hence the very handy, and very reliable, special dividend of 50p per share for 2017. That bolsters the 29.7p ordinary final payout taking full year income to 95p per share. About 97p per share of dividends are anticipated by analysts in 2018, implying a 3.4% yield at today’s share price.
