Qualiport

[ July 23, 1999 ]

Thwack!

By Bruce Jackson (TMFgoogly@aol.com)

Alexandria, Virginia, USA -- Yesterday Misys (LSE: MSY) reported their annual results for fiscal 1999, and the shares got thwacked. As to why this particular Fool was not particularly surprised, it's all in Wednesday's update. I've only briefly been able to skim through the massive results release, but for those with an eye for the numbers can check out yesterday's Lunchbox.

Right here, right now, I'm not going to make any judgements or profound comments about Misys, because I want to reserve judgement until I've had a chance to distil the full results release. Just to briefly address the issue of cash generation, which Rob mentioned yesterday, I saw nothing to really alarm me. In fiscal 1998, operating (accounting) profits of £100m translated into £140m cash from operations. That is a phenomenal conversion rate, and one that is probably not sustainable. It was fuelled by a ton of deferred revenue, whereby the company receives cash in advance of providing the service it is being paid for. This year, operating (accounting) profits of £132m translated into cash of, wait for it, £140m. No change from 1998!

Looked at in isolation, this is still a good conversion ratio. A lot of companies struggle to achieve a 100% cash conversion ratio. It's just when you compare it to 1998's amazing performance that it doesn't look quite so good. For a company that places so much emphasis on its cash generation, it's reassuring to see them live up to their word. I'll have more on Misys next week.

Along with Misys, yesterday another company that interests the Qualiport released its interim results. Life assurance giant Legal & General (LSE: LGEN) announced a 12.8% increase in operating profit. This has been fuelled by a 25% increase in funds under management, largely due to the popularity of their low cost index tracking funds. As regular Fools will know, we advocate individuals consider investing in an index tracking fund as a cheap and easy way to match the stock market returns.

Legal and General are potentially an attractive investment proposition. Over the past few years they have cemented their market lead in index tracking products, largely due to a mass marketing campaign, but also through the continued inability of actively managed funds to 'Beat The Footsie'. Many high profile companies, including our own Unilever (LSE: ULVR), now invest their pension fund money in index trackers, and since Legal & General are the biggest player in that market, there's a reasonable chance some of the Unilever millions will end up in their coffers.

The other attractive part of the L&G business involves the introduction of the Government's stakeholder pension in 2001. The company are already positioning themselves to be a big player in this potentially massive market. Whilst some high profile competitors have been bleating about the 1% minimum charge the Government is planning to impose, L&G are getting on with making sure they are the big player in this massive market.

My problem with life assurance companies is twofold. Firstly, I don't really have an appreciation of which company in the sector is the best, and how to judge that. L&G are obviously up there, but where does one place Prudential (LSE: PRU), Perpetual (LSE: PER) and Norwich Union (LSE: NU.) in the pecking order, for example? My second problem concerns valuation -- how do you value these companies? I can do a reasonable job on insurance companies, but life assurance is a different kettle of fish. Net asset value traditionally gives you a reasonable fix on valuation, but these companies, which are growing quickly, obviously deserve to trade above net asset value. L&G are trading at about 160p, but their net asset value is 96p per share.

I'm sure there is a way to have a reasonable stab at a life assurance company's value, and that's something I want to tackle in the near future. In the meantime, if anyone has any views on the sector, and which company will be the big beneficiary of the growth in the stakeholder pension, please post them to the Qualiport message board. The Egg subsidiary of Prudential is an interesting play by that old giant of the industry, but at the moment is a tiny part of their business, even if it would probably be astronomically valued -- as an Internet company no doubt -- if it was trading as a separate entity.

Have a great weekend Fools, and see you on Monday.

Qualiport Numbers
23/7/1999 Close

Company  Change    Bid
DELL(US)-1.60    39.50
EMA     +0.22    11.31
IIG     +0.03     2.98
MSY     -0.23     5.65
PIZ     +0.10     7.52
RTO     +0.05     2.45
 ULVR    +0.01     5.75


Qualiport Stocks

Last Rec'd  Total # Company   In At Current Change
 27/10/98   755     Indep Ins  2.58  2.98    15.5%
 17/04/98   169     EMAP      11.34 11.31   (0.3%)
 22/04/99   347     Misys      5.76  5.65   (1.9%) 
 19/12/97   783     Rentokil   2.55  2.45   (3.9%)
 04/11/98   245     Pizza Exp  7.93  7.52   (5.1%)
 27/01/99    74     Dell (US) 44.63 39.50   (11.5%)
 17/07/98   266     Unilever   7.53  5.75   (23.6%)

Last Rec'd  Total # Company     In At  Value   Change
 27/10/98   755     Indep Ins  1972.64 2249.90  277.26
 17/04/98   169     EMAP       2341.32 2284.62  (56.70)
 22/04/99   347     Misys      2028.71 1960.55  (68.16)
 04/11/98   245     Pizza Exp  1966.34 1842.40 (123.94)
 19/12/97   783     Rentokil   2046.53 1918.35 (128.18)
 27/01/99    74     Dell (US)  2007.42 1771.52 (235.90)
 17/07/98   266     Unilever   2052.00 1529.50 (522.50)

Cash:                                       £3,371.66
Current Total :                            £16,928.50

Total Invested:                            £18,184.62
Profit/(Loss) :                            (£1,256.12) 

Value Per Share

                    Day      Month      Year      
Qualiport          0.49%    -0.85%     -9.99%
FTSE 100          -1.44%    -1.76%      5.52%
FTSE All Share    -1.19%    -0.91%      9.18%