Bond International Software continues to see strong growth in sales and profits, but the interim results raised a few questions.
I bought shares in Bond International Software
(LSE: BDI)
in early 2005, following a filtering exercise. I was mainly looking for a company with:
- Low PE;
- Strong but plausible projected growth;
- Healthy cash situation.
Bond, which develops and sells software to manage staffing and recruitment, scored highly on all these criteria.
The growth was delivered -- better than expected, in fact -- and the forecast is for more to come. While the price has risen nicely, the shares are still rated well below the average of the software sector. This week's interims results, however, raised a number of questions in my mind, so I contacted Bruce Morrison, the Finance Director, to help answer them:
Product Development
A year ago Bond said that the development of its Adapt software was "substantially complete" having spent £1.65m, yet a further £1m has been spent since then. The company tells me that the original comment only related to the development of the basic engine and not to applications derived from it -- most of the £1m spent on Adapt since then has been on applications.
As stated in the final results, the company will "continue to invest significantly" in product development. Nothing unusual about that for a software company, so I wouldn't expect any major savings in this area.
Deferred payments
When I read the results I was worried about a deferred consideration which reduced cash by £718k. I've now learned that this was related to last year's acquisition of Prairie Developments Inc, and there are no further deferred considerations to be paid. I can sleep more easily on this now.
Working capital
Another concern was working capital which has increased considerably since the start of the year. This was partly due to the payment of the deferred consideration mentioned above -- this had been included in creditors in the year-end results -- and partly due to a couple of invoices that were still outstanding at the end of the period.
Morrison confirmed to me that this was purely a timing issue, and that there had been no changes to the business model. We can expect an improvement in this situation in second half.
Having allayed these concerns, I'll continue to hold the shares, because:
- Forward PE is still only 12.1, approximately half the sector average;
- Expected EPS growth is 26% this year;
- There's plenty of cash for acquisitions, following a placing in May, and management are prepared to wait for the right deal;
- Further potential in US (new sales office) and China (new software handles Chinese language).
Bond is just one of the many companies that Champion Shares editor Maynard Paton has reviewed over the past year, in addition to his monthly share tips. You can profit from this valuable resource by taking a free 30-day trial now.
Padraigowns shares in Bond International Software.
