QUALIPORT
MMT: Time To Cut Our Losses?

By Maynard Paton (TMFMayn)
May 21, 2001

Carburton Street, London -- Qualiport member MMT Computing (LSE: MMT) published its interim results on Wednesday. The dreary financial performance had already been well flagged. The IT consultancy issued a profit warning last month.

At the moment, the Qualiport is sitting on a thumping 58% loss with its MMT shares. With the latest results heralding an operating loss after years of profits, plus a boardroom shake-up to contend with too, is it time to cut our losses?

The results

The results for the six months ended 28th February 2001 are shown below. To put the recent drop in financial performance into perspective, the table also shows the six-month period immediately prior to the one just passed, as well as the comparable first-half period of last year.

                                Six months to
                       28/2/01    31/8/00    29/2/00

Turnover (£k)           16,858     20,917     16,817
Operating profit  (£k)    (204)     3,298      1,959 
Pre-tax profit  (£k)     1,106      3,960      2,016 
Earnings per share (p)     4.8       22.0       10.6 
Dividend per share (p)     6.7       13.2        6.6 

MMT only managed to record a pre-tax profit in the latest interim period after the disposal of an investment. Also of note is the small increase in half-year dividend, from 6.6p to 6.7p. The progress of profits was hindered by both MMT divisions -- Business Solutions and Specialist Solutions.

Business Solutions

                               Six months to
Business Solutions     28/2/01    31/8/00    29/2/00       

Turnover (£k)           12,900     12,626     13,033  
Operating profit  (£k)   1,250      1,491      1,769

The Business Solutions division mostly comprises of MMT's "time and materials" IT consultancy arm, the subsidiary that had been the foundation of the company.  During the interim period, "tough market conditions" had led to "considerable pressure on margins" in this area.

The partial repositioning of this particular element of MMT, towards client server and Internet-related applications (as highlighted at the full-year stage in November), hasn't been entirely successful thus far. The overall profit contribution from this department was described as "most disappointing".

Bright spots in the Business division were MMT's management consultancy operation and Hypnosis, a media web site design house. Strong sales growth was experienced in both of these areas. However, their contribution has to be put into context -- only 8% of group revenues are generated from these two operations.

Specialist Solutions

                               Six months to         
Specialist Solutions    28/2/01    31/8/00    29/2/00       

Turnover (£k)            4,000      8,291      3,784  
Operating profit  (£k)  (1,450)     1,648        349 

The Specialist Solutions division comprises mainly of MMT Energy, a provider of software systems to the electricity market. It was this division that caused most of MMT's financial damage.

A decline in UK demand, the slowdown in the US, plus additional product investment costs (to retain the interest of prospective US and European clients) sent operating profits for this subsidiary sharply into the red. Around £2m of investment relating to new overseas markets was expensed in the latest interim period, with another £2.5-3m planned over the next twelve months. The "full benefit" of this expenditure will not be apparent until mid 2002.

Boardroom upheaval

Coupled with the operational difficulties, MMT shareholders also had to contend with a boardroom upheaval last week. Tony Grellier, who was due to leave his post of Managing Director in August, has now stepped down. In his place comes Paul Marks, formerly the MD of MMT's management consultancy operation. What's more, MMT's Finance Director is to stand down this July too.

Marks confirmed on Wednesday that he is charged with returning MMT to its historic levels of profitability. He is to:

* Streamline the organisational structure, as the current structure is one largely defined by acquisition. The move should lead to cross-selling opportunities, of which there are few at present.

* Re-impose controls on costs. Apparently, MMT "jumped ahead of the market" in respect of some "e-service" investment in the last year. Marks is keen to let the clients define what requirements are needed.

Mistake

No doubt about it. MMT were an investment mistake. The original attraction to the company was its position in a growth market, backed by a long and distinguished financial performance.  Historic operating margins of over 20% implied a very lean and efficiently managed IT firm.

Trouble was, the efficient management disappeared when Mike Tilbrook, the founder of MMT, moved from executive to non-executive Chairman in mid 1999. As that switch coincided with the run-up to the IT industry's Millennium slowdown, it was difficult to tell whether the new boardroom incumbents were keeping the recipe for success on track. Their departures suggest not.

But management question marks still remain. Paul Marks, the new group MD, is an unknown quantity. Furthermore, not only does he have to contend with the difficult post-Y2K industry environment, he's also got the additional duty of implementing various organisational changes. No easy task.

Advantage MMT?

So, with the management uncertainty, are there any inherent competitive advantages within MMT?

Marks commented upon MMT's use of its own permanent staff as an advantage for the Business Solution division. This preference benefits the client by having known and accountable staff on their projects, rather than having unfamiliar and perhaps less dependable freelance workers. There are "not too many" competitors who follow the permanent staffing route, according to Marks. 

On the Energy software side, MMT are one of three main players in the UK. Marks would only reveal that MMT had a "fair share" of this particular market at present. And with its two main competitors owned by large parent companies (much larger than MMT), there's nothing to suggest MMT either has, or will have, a dominant UK market position.

All in all, we're not talking industrial franchises with MMT. Compare MMT with Qualiport maybes Imperial Tobacco (LSE: IMT), Ultraframe (LSE: UTF) and Halma (LSE: HLMA). In terms of relative market presence, MMT looks quite frail.

At the moment, MMT is simply a bet on the talents of the new MD to resolve the difficulties within UK consultancy operation, a recovery in the IT marketplace, plus the overseas potential of the Energy division. The US and European markets for Energy are said to be "dramatically" larger that the "mature-ish" UK market place. That said, there's no guarantee that MMT can replicate its UK Energy success abroad.

Valuation and summary

With the immediate outlook for MMT looking distinctly cloudy, there is one positive -- the shares are cheap.

Significantly, MMT increased (albeit slightly) their interim dividend. Marks mentioned on Wednesday that he was "determined" to keep MMT's upward dividend trend on track. Should MMT maintain their full-year payout (of 19.8p), at 237.5p, MMT shares would yield 8.3%.

But the ultra high yield is not all it seems, for MMT won't be able to fund the payout from profits. Instead, the dividends will come from the company's cash pile, currently worth around 58p per share. The stock market must sense a dividend cut and, as such, is not pricing in much chance of a company recovery.

Without much in the way of identifiable competitive strengths and "great management" factor, MMT aren't a genuine Qualiport company at present. However, the shares are just too cheap to sell out now. I'd prefer to collect the (almost certain) 8% yield and effectively have any recovery thrown in for free. That said, should the Qualiport ever become strapped for cash as and when a superior company becomes attractively priced, MMT will be the first to go.

More: Notes from the interim presentation | MMT Computing discussion board

Disclosure: The author has a beneficial interest in MMT Computing