Sunday, June 14, 2009

ISS - a second half loss for ISS Group?

I admit up-front I like this company (and own its shares at higher levels).  

ISS group has developed an IT platform that assists large multinational companies to manage their information flows. Their principal product is called BabelFish, which for any self respecting Douglas Adams fan should tell you everything you need to know - for the philistines amongst us, there are large efficiency gains to be had for the likes of our major mining companies in having their various management systems effectively talking to one another.

I originally bought into the company when it appeared (to me at least) that they were transitioning from relying on up-front sales revenue to a more annuity 'servicing' style revenue.  You can see this in the following breakdown of their half yearly results (note the maintenance & support and licence fees).

  6 mth to 6 mth to 6 mth to
  31/12/08 30/6/08 31/12/07
Licence 4.121 3.999 1.784
Maintenance & support 1.609 1.286 1.191
Services 4.961 6.050 3.668
Other 0.495 0.218 0.641
Revenue 11.186 11.553 7.284
Employees 5.178 4.314 2.747
Employees - non cash 0.949   0.432
R&D spend 1.665 1.803 1.298
Consulting 0.485 0.884 0.366
Rent etc 0.425 0.279 0.217
Travel 0.265 0.386 0.247
Other 0.817 0.99 0.639
Expenses 9.784 8.224 5.946
EBITDA 1.402 3.329 1.338
Depreciation 0.187 0.142 0.083
EBIT 1.215 3.187 1.255
Interest 0.002 0.002 0.002
Tax 0.026 0.211 0.472
NPAT 1.187 2.974 0.781
Shares on issue 133.625 101.507 99.763
EPS 0.018 0.029 0.008

All looks pretty good?  Consider also that the company 
  • has next to no debt 
  • its NTA (valuing the technology they have developed at zero) is around 7 to 8 cents, 
  • they granted Schlumberger (major US engineering company) an exclusive sales agreement for up-stream oil and gas sales in exchange for a A$17m commitment (to be paid at an undisclosed rate per annum)
  • and they have started broadening their client base away from the resources sector and into integrated industrials (they have a beachhead contract with Mars in Australia)
And you can quickly come to the view that current share prices under 20 cents are pretty attractive (~18 cents equates to a P/E of ~5x on an annualised Dec 08 numbers) for a company that should have strong growth prospects leveraging a leading technology that has largely been paid for (note however R&D spend is still ~17% of expenses).

But all is not well.  In their half yearly, management prudently suspended the dividend and stated that they would be trimming their largest cost - employees.  In the context of a global fry-up, that's good.  They also said they were seeing lower interest from potential clients and that at least one contract had been terminated.  That's not so good.

The single biggest hurdle for the company seems to be that while BabelFish is ultimately a cost-saving, efficiency-driving, gill-breathing miracle - it costs a lot to deploy.  It needs to be tailored to clients needs.  The global financial crisis has scuppered the dreams of many a CEO to spend money on new projects and it appears that ISS Group is suffering from this same trend.

The stock brokers Patersons are the only broker that cover ISS.  They have a profit forecast for FY2009 equating to EPS of 1 cent.  This implies an after tax loss of around $0.6m for the second half for ISS.  Given that they share the same bathwater with ISS (they are both based in Perth), it would be a surprise if Patersons was wildly wrong.  Note however, ISS haven't announced anything to to suggest that they will make a loss (and continuous disclosure laws are as applicable in WA as the rest of the country).

So where to from here?  As I say I like the company.  The question is what will the results will look like - how have the gone in managing staff costs down and have sales dried up completely (they have been unusually quite on this front in this half - where they usually announce contract wins as they arise).  Under 20 cents, it still represents a value opportunity on my books - my guess is that part of the recent weakness has been tax loss selling - but it's not for the faint hearted.  I'm going to wait for the results before putting any new money in - you never know, we might get lucky and buy them at NTA... 

No comments:

Post a Comment