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Fidessa falls on concerns about outlook for City software specialist

Discussion in 'Market News' started by Lily, Nov 11, 2015.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Company under pressure a day after its latest investor presentation

    Fidessa, which supplies financial software to City traders, has fallen more than 2% in a rising market a day after its latest investor presentation, not the outcome it would have wished for.

    Its shares are down 46p at £19.29, with analysts remaining unconvinced by the outlook for the company. Many of it City clientele will face cost pressures when new regulations on price transparency - including how much brokers pay for research - come into force (albeit a new delay means this could take another year from now).

    Fidessa’s equity markets position is strong and generates cash as a mature, subscription-based software model should. However, the forthcoming disruption to the predominantly sell-side customer base still looms large. Forays into already well served derivatives and fixed income markets will not be sufficient to provide material net growth. While there is a risk our call may be early, since the supportive dividend is attractive (albeit uncovered), the 25 times PE rating remains eye-watering for a stock with negligible growth since 2011, where potential catalysts all appear negative.

    Whilst there are some sparks of hope our over-riding impression is that Fidessa is only a few paces ahead of weak competitors and markets. We were partly disappointed - the last time Fidessa did a capital markets day was 2008 - so much has changed since. Fidessa has the potential to rock the global fintech (as opposed to cash equities) market but its new ventures falter (it still doesn’t know what to do in Fixed Income and Derivatives, and is three years from profitability). The company is concentrating on its financial ‘returns strategy’ - ie the special dividend - but here investors have better choices, such as (say) Micro Focus (buy) and Computacenter (buy).

    We are pleased that with individuals like Steve Grob, the strategy guy, there is true vision. More parochially, news of a potential delay on [new regulations] MiFID II should impact estimates as hard-pressed customers are able to hold off non-recurring spend (we downgrade a smidgen). Fidessa repeated the more upbeat note from its last trading update. In the wake of the meeting we are less of the view that Fidessa is stuck and is incapable of innovation, but it struggles to enter co-related markets. On balance, and to reflect a more positive view, we increase our target price to 1712p (from 1587p). Shares are too expensive to purchase, hence we retain our hold.

    The Capital Markets Day gave an upbeat outlook for the very long term evolution of the business, potentially broadening out derivatives, fixed income, buy-side sales to match their respective shares of the current financial markets and delivering around £1.2bn sales. However, we believe this will likely require additional investment and it could limit leverage (derivatives will take 7 years from first win to hit profitability). Lack of profit progression keeps us at hold with the dividend being the main valuation support.

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