Fool's Eye View

[ September 4, 2000 ]

Guardian iT -- The Profits of Disaster

By Maynard Paton (TMFMayn)

Carburton Street, London -- Highly-rated tech stocks always give me the jitters. Great expectations of a company's product or service can end in an investment disaster should the hope and optimism of the future never turn into reality. However, if I was forced to purchase any company on a stratospheric profit multiple, I suspect Guardian iT (LSE: GRD) would be near the top of the list.

The company describes itself as a business continuity and disaster recovery specialist. The service is rather simple. Large corporations pay an ongoing fee for Guardian to supply emergency computing premises and services should a catastrophe strike their own facilities. Today's interim results from Guardian highlight some of the attractions of the company.

Visibility and predictability of revenues

Sales in the first six months of the year surged 69% to £33m, aided partly by acquisitions. But the long-term nature of Guardian's contracts combined with the necessity of clients to employ Guardian's services lead to one of my favourite financial expressions -- the forward order book. Contracted future revenues at Guardian increased by 50% to £126m, implying another two years of (albeit static) sales are already in the bag. Very reassuring for investors.

Another enticing feature of the results are the fat margins associated with Guardian's business. Operating profits increased 46% to £4.6m, equating to a very healthy 18% operating margin. Indeed, a group reorganisation within the reported period held back the operating margin from the traditional 20%-plus level. From these figures, I suspect the marketplace is far from the cutthroat dogfight that dominates some parts of the IT industry.

Growth

Growth is a mixture of acquisitions and organic growth. Acquisitions in the period consisted of the £27m purchase of Catalyst Solutions and the £170m purchase of the Safetynet Group, Guardian funding the second through a £128m rights issue. This corporate activity ensures Guardian's place as the market leader in its disaster recovery sector and no doubt enables the group to set the pace when it comes to pricing.

But the big opportunity for Guardian is web hosting. On a European basis, this particular market is expected to be ten times the size of Guardian's traditional disaster recovery industry. Guardian suggests that, with the benefits of their core services on offer too, they are "ideally placed" to capture a slice of this growth market.

All in the price

Plenty of sales visibility, chunky margins and opportunities for substantial growth are all great features for any business. Unfortunately, the stock market has more than priced these characteristics into the shares. Having lost 57.5p this morning, Guardian are now at 1,597.5p, making for a prospective price to earnings (P/E) ratio of 106. Far too rich for my liking, but for those with a head for heights in the IT sector, Guardian is one of the most attractive players.

Where Next?

Visit the Guardian iT discussion board | website
Read the interim results in full