These niche software companies are worth a closer look.
Trawling through hundreds of small cap stocks, I recently came upon two software companies that definitely merit more research and possible inclusion in your portfolio.
Allocate Software
Allocate Software (LSE: ALL), a provider of rostering software, had a big year in 2009, strengthening its position in the UK healthcare market. Its customers now range from NATO to the NHS, where it has a customer base of over 180 NHS Healthcare Trusts.
For the full year to 31 May 2009 it made unchanged pre-tax profits of £1.8m on revenues of £15.8m (2008: £11.6m). Profits were flat mainly due to a large increase in selling and operational costs. This was planned though, and reflected the continued development of its Services business, the expansion of its sales capability and, in particular, investment in the development of its product platform.
With a cash balance of £3.7m, it should be able to make further acquisitions without taking on too burdensome a level of debt.
Allocate recently added new customers in both the maritime and defence sectors. Indeed, in a climate where all organisations are attempting to achieve operational efficiencies, demand for its software, which helps allocate human resources more efficiently, appears to be relatively recession-proof.
Consensus estimates are for a pre-tax profit of £2.8 million next year, and if that is achieved a maiden dividend shouldn't be far off. It's still a very small company with a market cap of £25m and, while it has been on the acquisition trail itself, it could make a tasty takeover target.
At 56p it is on a forward P/E for 2010 of 10.8.
Anite
Anite Group (LSE: AIE) has two main strands to its business.
Firstly, it provides specialist systems and software for testing mobile phone handsets and networks. Secondly, it supplies reservation systems, managed services and e-commerce applications to tour operators, airline consolidators, cruise, ferry and rail companies.
For the full year to 30 April 2009, pre-tax profits were down by a third to £6.4m. Revenues slipped 3% to £90.1m.
Anite sold its Public Sector division in October 2008, for net proceeds of £45m. It wants to become more focussed and a global leader in wireless test software.
Net cash stands at £27.3m after the firm reduced its borrowings by £25m. Following the disposal last October, £10m was returned to shareholders via a 3p special dividend. This was combined with an eight for nine share consolidation and the board has also committed to continuing a share buyback programme worth up to £10m.
Consensus broker estimates are for pre-tax profits of £9.8m in 2010. The shares are currently 35p, making the forward P/E 14 and the prospective dividend yield 2.8%. Looking towards the dim and distant future in 2011, the P/E falls to just under 10.
Its share price has been hit but it is starting to look attractive at these levels.
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