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Looking for the brighter side |
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Date: 26/03/2008 |
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Looking for the brighter side
As we approach the end of the first quarter, it is clear that technology investors are assuming the worst when it comes to the outlook for technology spending. Notwithstanding the fact that, as I write, share prices are enjoying a bounce following the injection of £100bn of additional liquidity into the banking market, the share price performance of listed SCS companies has been very poor in Q1. The average share price decline of the ten largest stocks in the sector up to mid March was 14.8% and that number hides some even weaker performances.
Share prices drop
Shares in Logica, Misys, Telecity and Micro Focus have all dropped over 20% since the start of the year and the picture is little different across the sector. As a consequence of this share price performance, unsurprisingly, valuations have continued to decline. PE ratios for the current year have slipped from 17.8x to 16.1x for the larger stocks and from 13.6x to 12.6x for the smaller stocks.
What is interesting is the juxtaposition of this share price performance with the tone of recent company statements. We are coming to the end of the reporting season and the vast majority of results for UK listed SCS companies were positive. Whilst almost without exception, the outlook statements accompanying those results made reference to tougher macro-economic conditions; they also said that they had seen little no impact on new business as yet.
Bellwethers of tech spending in the UK such as Computacenter reported its first revenue growth for some time and continues to experience solid demand in 2008 especially in areas such as data centres.
Some will point to Logica’s somewhat lackluster UK performance (outside of Public Sector) as evidence of a slow down, but I see this as a company specific issue.
Whilst comments from SAP specialist Axon that UK margins would come down over the next period were perhaps more worrying, of the 70 companies that have reported results or issued trading updates so far this year, only nine have been below expectations. Of the rest, 14 were ahead of expectations and the remainder were neutral.
Future trends
But all of this is missing the fundamental point that the City is looking 12-24 months ahead and, frankly, it doesn’t like what it sees.
For my part, I’m afraid I have to agree with the City on this one. Put aside for one minute the top down view of slower economic growth, there are a number of bottom up reasons to be worried about the outlook for IT budgets over the coming months.
Primary amongst these is that the two largest sectors for spending on software and IT services in the UK, the public sector and financial services, are under increasing pressure to reign back spending.
Austerity measures by the Brown government are starting to bite into IT budgets in local and central government resulting in a tangible slowdown – reference the recent profits warning from housing software vendor IBS Opensystems. In financial services, the confluence of the credit crunch and weak capital markets is starting to impact spending in both retail and investment banking.
Optimists will point to megatrends such as SaaS and mobility as reasons to be more cheerful but, for me, spending on these areas, whilst growing rapidly, will not be sufficient to offset a general decline.
Whilst we may we may get the odd optimistic bounce in share prices as we move through 2008, I’m convinced that the general trend will remain downwards.
Profile
Ian Spence has been analysing the performance of technology companies in the UK for 15 years. In early 2007, Ian left his career in the City to set up IS Research, an independent research company which analyses the corporate and financial performance of software & IT services companies in the UK.
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GS-insight welcomes technology sector analyst Ian Spence who will be offering his thoughts on the performance of the UK’s public software and services companies and commenting on the outlook for the industry. |