Fool's Eye View

[ June 14, 2000 ]

Guardian iT buys again

By Stuart Watson (TMFTiger)

Great Titchfield Street, London -- Over the last few months we have seen a number IT businesses warn that their profits will be lower than expected. The latest to do so, just yesterday, was Computacenter (LSE: CCC). Share prices in the sector have declined across the board in the last three months. But one company has managed to hold its own, at least so far. That company is Guardian iT (LSE: GRD), the business continuity and disaster recovery firm.

Guardian, originally part of ICL, has grown rapidly in the last few months through a combination of solid organic growth and acquisitions. It is a high profit margin business that benefits from long-term contracts with its suppliers. It is currently valued at around £740m. That's pretty racy for a business which saw sales of £49m and profits of £8.3m last year. But its forward order book stood at over £100m, twice the level of sales last year. The market is set to continue growing as well. The International Data Corporation believes it will more than double from £250m in the UK in 1998 to £525m by 2003.

On the acquisition trail

Earlier this month it bought Catalyst Solutions for £26.6m. Catalyst only has annual revenues of £4m. The money used to pay for this purchase came from a placing of Guardian shares at 1370p back in March. Today Guardian announced a much larger acquisition. However this time it is raising the necessary dosh via a rights issue at 1000p, despite the fact that its share price is at more or less the same level as when it last raised money for its shareholders just three months ago.

The target this time is Safetynet, which has sales of £21.9m, on which it makes operating profit margins in excess of 15%. It also has a forward order book twice its current level of sales. Guardian is paying £170m for this business, whose major shareholders include 3i (LSE: III) and Reuters (LSE: RTR). It believes that this deal makes it the largest player in this market in the UK, and the third largest in Europe. Before today's acquisition the company had about one-eighth of the UK market. Further acquisitions remain a distinct possibility.

It is also moving into web and server hosting which shares many characteristics with the business continuity market, under the iXguardian brand name. This comes hot on the heels of the relaunch of its archive business, Televault.

But...

Despite the fact that the rights issue was at a discount of 25% to last night's closing price the market seems to be nodding its approval. The shares are up by 3% this morning. Overall, this looks to be a good move for Guardian, even if it is paying top dollar at more than seven times annual sales. For potential investors the dilemma remains. Guardian is undoubtedly one of the higher quality plays within the sector. It has remained unscathed whilst others have struggled.

But how much should you pay for such a business? Forward estimates show the share is sitting on the forward price to earnings ratio of over 90 for the current year, falling to 70 the year after. The Qualiport has looked at Guardian before and sat on its hands because of the lofty valuation. It looks like Guardian will remain on the Watch List for little bit longer.

Related Links

• Guardian IT discussion board | website
• Review of 1999's interim results