Qualiport

[ November 6, 2000 ]

MMT And The Millennium Glitch

By Maynard Paton (TMFMayn)

Carbuton Street, London -- The Qualiport's largest holding (if you exclude cash!) is MMT Computing (LSE: MMT). With the company reporting its full-year results this Thursday, and having received precious little portfolio coverage since its half-year numbers, I think it's high time MMT took to the Qualiport spotlight.

This feature will briefly review our investment in MMT and preview the company's forthcoming announcement. However, should you wish to get fully up to speed with the company, you may want to read the original Qualiport proposal, these follow-up thoughts and this interview with the MMT's Managing Director, Tony Grellier.

The Glitch

A few weeks ago, Bruce wrote these words on "the glitch:"

"Increasingly so, I am firmly of the opinion that the time to buy companies is on the glitch. Throughout a company's long corporate life, it will undoubtedly go through bad patches... The challenge for the private investor is to determine whether this is a temporary or permanent glitch -- no mean task."

MMT is a "glitch investment". The company is an IT services and software supplier and was adversely by the Y2K industry downturn. MMT's latest interim results, covering the Millennium period, graphically convey the financial horror story.

                         Six months to     Change
                      29/2/00    28/2/99   

Turnover (£k)          16,817     21,116    -20%

Operating profit (£k)   2,118      4,891    -57%

Earnings per share (p)   10.5       27.0    -61%

Dividend per share (p)    6.6        6.0    +10%

The reasoning behind the Qualiport's purchase of MMT shares is simple:

• MMT possessed a great long-term track record, having averaged organic annual sales growth of around 15% throughout the 1990s;

• MMT had been severely punished by the stock market for the Millennium profit trouble. When the Qualiport invested, MMT shares were on a prospective price to earnings (P/E) ratio of 10 based on forecasts for the year to August 2001 (the shares were bought both before and after the aforementioned interim results), and;

• If MMT resumed its historic trend after the Millennium slowdown, then a share price re-rating combined with the growth of the IT industry could reap long-term investment rewards.

Our valuation was based on estimates for the year ending August 2001. But that doesn't mean this week's results, covering the year ending August 2000, are totally academic. Although the full-year financial accomplishment in itself may not be entirely relevant, certainly the second-half performance will give a pointer to the validity (or not) of the important 2001 forecasts. And it goes without saying that MMT's comments over current trading must be carefully studied too.

Keeping the staff busy

With over 90% of MMT's costs comprising of employee's wages, having well-paid staff sitting idle leads to depressed company profits. To measure the efficiency of MMT's employees, the key investment ratio to look out for on Thursday is the staff utilisation rate. Simply, this figure reflects the average proportion of staff that performed fee-earning work over the period.

Over the past five years, MMT's staff utilisation rate has averaged 92%. The table below shows how the utilisation rate deteriorated during MMT's first half (Sept 1999 to February 2000). But notice how the staff utilisation rate picked up in March, after MMT's blue-chip clients emerged from their Millennium bunkers.

Month            Utilisation Rate
                       (%)

September 1999         92
October 1999           86
November 1999          84
December 1999          86
January 2000           80
February 2000          82

March 2000             87
April 2000             94

Utilisation rate in action Indeed, if you combine an estimated staff utilisation rate with the estimated number of staff employed, a rough and ready profit forecast can be determined. So, here's my stab at pre-empting Thursday's full year numbers. Simply, I'll make a prediction just for the second half (covering March 2000 to August 2000) and add it on to the first half results. MMT had 524 employees at the end of April 2000. As the company was busy recruiting at that time, I'll assume MMT averaged 524 employees throughout the second half. I'll also assume that the staff utilisation ratio was just 90% in those six months.

In the 18 months ending February 2000, each utilised MMT staff member generated around £80,000 of annualised revenues. So, I'll assume that the £80,000 level was maintained through to August 2000.

Thus, with those three assumptions, we can deduce a rough second-half turnover figure as (524 * 0.9% * £80,000 / 2) or £18.87m.

The next item to deduce is staff costs. I'll assume that the average employee salary kept steady at 1999's level of £53,500(!). Total staff costs for the second half are (524 * £53,500 / 2) or £14.01m.

Subtract staff costs from the turnover figure and we're left with £4.86m profit. Then subtract £0.86m (to make things easy) for other non-staff costs and we're left with pre-tax profits of £4m. After 30% tax and divided by 12.3m outstanding shares, those second-half profits equate to earnings per share (EPS) of 22.8p. Add that to the 10.5p produced in the first half and I forecast full year "normalised" earnings per share of 33.3p on Thursday.

Whether all this crystal ball gazing will prove at all useful remains to be seen. On Thursday, I'll review MMT's actual results. Hopefully, the announcement will herald the company's full emergence from its Millennium glitch.

Where Next?

• MMT -- A Delayed Recovery

• Nuttbusch asks "Time to Sell?"