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City experts remain torn after latest trading update
Thursday 04 May 2017 Author: Steven Frazer

Investor opinion continues to be split on equities and derivatives trading platform supplier Fidessa (FDSA) in the wake of its latest trading update.

We think the valuation looks too high given a lack of growth. A company statement on 27 April pointed to the uncertainty created by European elections, Brexit negotiations and the new US administration.

The FTSE 250 company says this is acting as a drag on decision making by customers, a potentially ominous nudge to the rising risk to forecasts this year. That news spooked investors, Fidessa’s share price slumping 8% to £24.01.

France is currently selecting a new president, either former socialist Emmanuel Macron or hard line nationalist Marine Le Pen. Germany faces its own federal election in the autumn.

Good at what it does

Woking-based Fidessa is a global leader in trading software systems to financial institutions. It has customers all over the world, although the US remains its biggest single market (43% of revenue). Around 87% of those sales are annually recurring, underpinning robust cash generation.

Investors must decide if the company’s dividend returns are reward enough in the face of stubbornly low growth. In the year to 31 December 2016 Fidessa reported a headline figure of 12% revenue growth, but this was substantially pumped up by large overseas earnings (about 70% of the total) and so benefitted from the pound’s plunge. Revenue expansion if you strip out currency effects amounted to just 3%.

The 21% jump in earnings per share (EPS) was also helped by low capital expenditure in 2016. A big office move in New York will likely depress EPS expansion in 2017. Analyst consensus is for just 3.5% EPS growth this year. That places the stock on a current year price to earnings (PE) multiple of 25.4. An anticipated 86.55p per share dividend this year implies a yield of 3.6%.

Analysts are split

The eight analysts that cover the stock are neatly split; three buyers, three sellers and two fence-sitting with ‘hold’ recommendations.

Investors may sympathise with their reluctance to take sides. On the one hand, challenging financials markets could grind Fidessa’s already limited growth to zero, perhaps even shrink revenue and profit if stressed financial institutions consolidate.

On the other hand, at such times investors seek safe havens and would be potentially attracted by the company’s high-recurring revenue and virtually bullet-proof, debt-free balance sheet.

Fidessa is a high-quality business but we continue to struggle to justify such a premium rating given limited growth.

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