Qualiport

[ October 8, 1999 ]

More on Misys

By Rob Davies (TMFEssex)

Despite our best efforts, or perhaps because of them, Misys shares (LSE: MSY) had a bad day yesterday, falling over 20p to 515p. The blame was placed on a Merrill Lynch analyst who had cut her forecast for this year and next by 10%. This sounds more dramatic than it is, because Lucy McFetrich had not changed her forecast since the 23rd of July while most of her rivals had been edging them down over the last few weeks. So this was really just a catch-up. The performance of Misys is all the more surprising given the strength of the technology sector after the good results from Yahoo!.

Whatever the cause it created good volume in the stock, 7m shares traded, which is mostly what a broker wants. Certainly, the Motley Fools were surprised at the price movement because we were at the Misys briefing this week, even though Lucy wasn't, and we saw and heard nothing to change our, well Bruce's, view.

The only deviation from the preliminary presentation was a breakdown at the earning per share level (EPS) of the loss attributable to the Internet business. In the last financial year the adjusted EPS was 16.7p, this represents the attributable profit of £92.8m on a per share basis for the ongoing businesses. That profit has now been disclosed as consisting of £94.4m from the established divisions and a loss of £1.6m from Internet Services. On a per share basis, this translates into 17p and -0.3p respectively.

Our initial thought was that this disclosure might have triggered the sell-off but, as the loss from Internet Services had already been disclosed at the operating profit level as a £2m loss, it should hardly be a surprise. Really what the company did on Tuesday was to hint to investors that establishing its Internet strategy was going to take some time and money to get going. This will obviously have a negative impact on the EPS line and Misys wanted to get its argument heard first. By separating the two issues at the bottom line, investors will be able to assess the impact of the Internet as distinct from the other, established businesses.

Kevin Lomax, chairman of Misys, is on record as saying that he thought it would cost about £50m to develop the portal and associated infrastructure for the company's Internet business. That, according to Misys, will have a detrimental impact on earnings. Discussing this issue with Alastair MacDonald, the group's Corporate Communications Director, I expressed surprise that this cost is not being capitalised. Charging it to the profit and loss (P & L) account is certainly a prudent method. But if the Internet is going to be the new sales medium, like shops used to be, doesn't it make sense to treat the building and development cost of a portal as capital investment?

Any other business establishing a new chain of retail outlets would certainly capitalise the cost and put them on the balance sheet. Developing and building a portal should be a one-off investment in the same way a new shop is. Although this is not a serious issue, I think it might be interesting to get some Foolish opinions on this. If you have views on this topic send your thoughts to the Qualiport message board or the Tech shares message board.

The Internet Services division, which is where all the money is being spent, is aimed at the personal financial services market to support IFAs (yes I know, as Fools we all hate them, but someone has to spoon-feed them). The site, known as Screentrade, will establish, it says, a pivotal position in web-based retail financial services. The portal will offer services such as stockbroking, savings, unsecured loans, mortgages, payments, pensions and general insurance to IFAs. This is a clear threat to the Exchange (LSE: EXC), and is probably the main reason its shares have fallen from 205p to 160p.

Last, but not least, of Misys' four divisions is Insurance, which was the original business in 1979. Servicing a network of 3,100 IFAs, 15% of the UK total, is where this unit makes its money. Taking care of the nuts and bolts of the transactions and keeping records, dealing with compliance issues and accounting are all mundane functions that have to be done. No one likes doing them, though I suppose somewhere there is a happy compliance officer (we used to call them Business Prevention Officers at the bank), but it all has to be done.

And this, I think, is the secret of Misys. It takes care of all the tedious, but oh-so-important, details that are vital to running a modern business. The sort of stuff managers are happy to delegate, or outsource, that takes up man-hours with little to show for it. Yet if they aren't done, the business doesn't know if it is bust or not, whether it has been paid, who its clients are or if it has broken any laws.

It is this "mission criticality" to use the awful cliché, that makes Misys indispensable and able to charge accordingly. For that reason it has an assured future; it is just a question of putting a value on that. Fools, what say you? Tell us on the Qualiport message board.

Qualiport Numbers
8/10/1999 Close

Company  Change    Bid
DELL(US)+1.10    44.30
EMA     -0.10     8.75
IIG     -0.02     2.76
MSY     +0.14     5.28
PIZ      0.00     8.10
RTO     -0.07     2.12
ULVR    +0.03     5.72
LLOY    +0.04     7.81


Qualiport Stocks

Last Rec'd  Total # Company    Buy  Current Change

 27/10/98   755     Indep Ins  2.58  2.76     7.0%
 29/09/99   356     Lloyds TSB 7.56  7.81     3.4%
 04/11/98   245     Pizza Exp  7.93  8.10     2.2%
 27/01/99    74     Dell (US) 44.63 44.30    (0.7%)
 22/04/99   348     Misys      5.76  5.28    (8.3%)
 19/12/97   783     Rentokil   2.55  2.12   (16.9%)
 17/04/98   169     EMAP      11.34  8.75   (22.9%)
 17/07/98   266     Unilever   7.53  5.72   (24.0%)

Last Rec'd  Total # Company     In At  Value   Change

 27/10/98   755     Indep Ins  1972.64 2083.80  111.16
 29/09/99   356     Lloyds TSB 2723.20 2780.36   57.16  
 04/11/98   245     Pizza Exp  1966.34 1984.50   18.17
 27/01/99    74     Dell (US)  2007.42 1986.79  (20.63)
 22/04/99   348     Misys      2028.71 1837.44 (191.27)
 19/12/97   783     Rentokil   2046.53 1659.96 (386.57)
 17/07/98   266     Unilever   2052.00 1521.52 (530.48)
 17/04/98   169     EMAP       2341.32 1767.50 (573.82)


Cash:                                        £2,710.26
Current Total :                             £18,332.13

Total Invested:                             £18,184.62
Profit/(Loss) :                            (£ 1,852.49) 

Value Per Share

                    Day      Month      Year      
Qualiport          0.16%     0.40%    -13.20%
FTSE 100          -0.02%     2.81%      5.39%
FTSE All Share    -0.04%     2.48%      8.31%