Brokers' Views: Numis Securities

The technology sector remains ‘fundamentally an attractive investment proposition’, say analysts Will Wallis and David Toms, given its cash generation, balance sheet strength and international breadth. Possible flies in the ointment, however, include ‘newsflow risk’ and the sector’s ‘late cycle’ nature.

Numis’s in-house research into UK IT job adverts finds the sector is below the level of the last downturn. While this implies that ‘we must be close to the bottom’, anecdotal evidence from company meetings ‘are not consistent with a recovery yet’. Although this poor data leaves the pair ‘nervous of any talk of green shoots’, they feel that ‘we are through the worst’. As such, they have identified four future winners, dubbed the ‘fab four’, all trading close to their lowest price-to-earnings (p/e) ratio relative to the market and offering ‘room for rerating once the market’s current fascination with cyclical stories abates a little’.

Fab four and friends
Wallis and Toms’ preferred and proven investment strategy in the sector is to ‘pay up for quality’. Numis’s current favourites include the FTSE 250 software pair of Fidessa, £10.75 and with a £12.80 target, and Micro Focus, 375p with a 500p target set. The other two, both rated hold rather than buy, are Aveva and Autonomy.

Outside this four, value investors are pointed towards educational technology outfit RM, web domain name specialist Group NBT and human resources technology counter Allocate Software, all trading on low multiples ‘despite what we see as robust business models with good growth prospects’.