QUALIPORT
Fool Admits Mistakes And Sells MMT

By Maynard Paton (TMFMayn)
August 30, 2001

Carburton Street, London -- Within the next five trading days, the Qualiport will sell its entire holding in MMT Computing (LSE: MMT).

The Qualiport's investment in MMT has been a catalogue of mistakes. The final straw came on Friday, when the company issued its latest profit warning. Let me relive the errors and highlight why MMT is leaving the portfolio.

The purchase

To recap, MMT was initially purchased in April 2000. There were subsequent top-ups in August 2000 and December 2000 too. Overall, the Qualiport spent just under £6,200 on MMT. The shares were bought at an average price of 567p. They now stand at 125p each.

The original attractions to MMT were:

* A long and distinguished record in IT consultancy;

* Traditionally high operating margins and returns on equity, and;

* The IT industry's Y2K slowdown. Assuming a recovery for IT services was on the cards for 2001 and beyond, MMT shares appeared good value on a then forward price to earnings (P/E) ratio of 10.

The management

But there was one fly in the ointment -- a recent change in management. Here's an ominous paragraph taken from the initial MMT purchase article:

"The near 20-year record of proven and quoted growth record gives credence to the ability of the long-standing management. The founder may have recently become the non-executive Chairman, but the new Managing Director, Tony Grellier has been at MMT for thirteen years and served five years in the boardroom. I'm banking on him not diverging from the historical recipe for success at MMT. With MMT, a services provider without any true "business franchise", it really is "management, management and management" that will keep shareholders content in the years to come."

As it turns out, Tony Grellier appeared not up to the job. He left MMT after just two years in charge. His successor is now busy restructuring the group and (somewhat ominously) taking care of various accounting issues too.

So, my first mistake was to bank on an unproven Managing Director who'd been in the top job for just a year or so. With MMT dependent on "management, management, management" and undergoing a turbulent time (Y2K) too, it was a terrible mistake. In hindsight, I should have seen how Grellier coped with the downturn before buying in. Gong!

The mystery suitors

Moving to November 2000, MMT announced that it had received "an approach that may or may not lead to an offer being made for the company". The shares quickly raced to around 800p and gave the Qualiport a 30% paper profit.

The gain was short-lived. A few weeks later, the talks were called off. Then MMT announced in February 2001 that Grellier would be leaving in the summer. And in the following month, MMT revealed it was considering selling off its Energy software subsidiary, talks which were again called off a few weeks later. What's more, all this corporate activity had a background of further delays to the anticipated Y2K recovery.

In retrospect, all the goings-on indicated a company desperately wanting to change from its then predicament -- not an encouraging sign for shareholders. I certainly should have considered why the mystery suitors (who certainly had more knowledge of MMT than any ordinary shareholder) declined to buy part or all of MMT. But I didn't. Gong!

The profit warnings

MMT has issued three profit warnings this year -- one in April, one accompanying May's full-year results, and the one last week.

I gave this summary in April: "Undoubtedly, MMT is in a state of flux as it reshapes its management and business direction. However, the original investment case, that of MMT recovering to benefit from the long-term growth of IT and e-service requirements, still stands."

And I wrote this in May: "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. "

Spot the investment mistakes:

* Why should MMT benefit from any growth in IT services? What was its competitive advantage to draw in the clients? Had I properly addressed that point when covering MMT's first warning, I'd have probably saved a lot of further anguish. Gong!

* Even after admitting that MMT had relatively few competitive advantages, and thus was not a Qualiport-type company, I held on anyway. Gong!

* The "almost certain" 8% dividend yield was a mirage. Given the recent woes, the historic dividend payment was unsustainable in the short-term. I knew at the time that the dividend was to be partly funded from the company's cash pile and not from continuing profits. But I didn't want to face the facts. Gong!

Why sell now?

To summarise, why sell now?

* The story has changed. Big time.

MMT is no longer a Qualiport company. And to be frank, I don't think it ever was. There's now another unproven Managing Director currently in place. And there's also the ongoing uncertainty emanating from the problematic Energy operation. Indeed, even after an additional £2m was spent to help boost Energy product sales earlier this year, the division continues to report more trouble.

* The latest warning has put real pressure on MMT's balance sheet.

Prior to the latest warning, a breakeven profit performance was expected. That being the case, the group's £7m cash pile could have cushioned shareholders.

But with a £3m loss now in the pipeline, things look decidedly tricky. There needs to be a sharp improvement in profits at MMT. And quickly. My rough calculations suggest the full-year dividend will be cut dramatically. And with that "almost certain" dividend now largely disappearing, valuation thoughts must turn to the notoriously unreliable book value measure. None of this is Qualiport investing.

* It's a time-waster.

Using valuation to justify holding onto a company that doesn't fit your investment strategy is a losing technique. As we've seen with MMT, more often than not, a poor company's performances do tend to keep the shares perennially "cheap". What's more, maintaining a watchful eye on troublesome companies takes up valuable time. Today's article was supposed to review recent results from Johnston Press (LSE: JPR) and Metal Bulletin (LSE: MTLB).

Never too late to sell

Okay. After a 78% loss on the shares, I might be capitulating. I might be selling out at the point of maximum pessimism. But I think I'm facing up to reality. And facing up to an investment mistake.

I can't imagine things getting much worse at MMT. But you never know. In my book, it's never too late to sell. Remember too, that you don't have make it back the way you lost it.  There are plenty of other companies out there that have more stable, predictable futures than MMT. More than likely, they'll deliver greater returns to shareholders in the future too.

More: MMT discussion board

Disclosure: The author owns shares in MMT Computing