Companies: SND   

After the IT bubble burst earlier this decade, many business software companies suffered declining sales and went bust. However, it now appears enterprise IT is coming back, which spells good news for Sanderson Group, a profitable software and IT services business with solid yield attractions.

A recent survey by market research company IDC indicated that demand for packaged IT solutions would drive investment across Western European vertical IT markets. In particular, IDC stated that there will be opportunities for enterprise software sales in the manufacturing, transport, communications and utilities sectors.

‘Sparked by improving economic conditions, IT investment in Western Europe is gaining momentum and overall the market potential is quite encouraging for vendors,’ said IDC analyst Nina Bonagura. Earlier, a report from IT analyst firm AMR Research revealed that IT budgets for small businesses in Western Europe are expected to increase by more than 12 per cent during 2007, with the UK set to outperform France and Germany. Furthermore, the report highlighted manufacturing systems as an area that is likely to enjoy the increased investment.

All of this is great news for IT businesses supplying small to medium-sized companies, especially AIM-quoted Sanderson. Manufacturing is a key sector for the group, which supplies software and IT services to a range of vertical markets within it. It is an area that in December Sanderson reported as having challenging market conditions, yet it accounted for 46 per cent of group revenue last year compared with 60 per cent for the two previous years. So indications that manufacturing IT budgets are on the up in 2007 should be positive for prospects.

Meanwhile, Sanderson’s multi-channel sales business, which addresses the needs of companies selling goods via retail outlets, online sales, call centres, mail order and via distributors, gained several new customers last year. Management, led by chairman Christopher Winn, insists that multi-channel sales is proving to be an active market sector.

Sanderson’s strategy is to develop its businesses through a combination of organic growth and selected acquisitions. The latest acquisition was its purchase of K3 Business Technology’s Elucid unit for which it agreed to pay £1.4 million in February.

Elucid develops software for companies that operate in multi-channel markets and last year it made an operating profit of approximately £200,000 on turnover of around £2 million. Sanderson expects the business to be earnings enhancing during its first full year of ownership and Winn said it will ‘form an integral part’ of Sanderson’s plans in the multi-channel sector.

In 2006, Sanderson produced adjusted pre-tax profits of £1.8 million. This year it is forecast to improve on that figure by delivering profits of £3 million, which should translate to earnings per share (EPS) of 4.8p. In 2008, profits are set to increase to £3.4 million, with EPS coming in at 5.4p. This means that Sanderson’s shares have a prospective price-to-earnings ratio of around ten times – very cheap for a software business.

The interim results are due in late May so close attention should be paid to how the group has performed this year in the manufacturing sector. Sanderson’s sound cash generation and strong dividend policy – it is expected to pay 2.7p this year, meaning it will yield 5.2 per cent at the current share price – suggest the shares are worth tucking away. Buy.