Pick of AIM by James Crux

The first of my picks is Northern Ireland-based First Derivatives, founded by ex-Morgan Stanley man Brian Conlon in the mid 1990s and floated on AIM at 50p in 2002.

This capital markets IT products and support services business, says Conlon, targets ‘investment banks and hedge funds, and delivers mission-critical systems that are key to the day-to-day running of banks. Amidst the bad times on Wall Street and in the City, we have still managed to maintain and grow our customer base.’

Last month, Conlon walked me through recession-defying interims, showing 66 per cent sales growth to £11.4 million and profits up 36.5 per cent pre-tax to £3.1 million. For the year to February, First Derivatives, while investing for growth at pace, should still deliver pre-tax profits increased to £6.1 million (£2009: £5.8 million), as its top line surges from £17.5 million to £22.5 million. Earnings of 31.5p and a 10p dividend are expected.

First Derivatives’ shares peaked at 347.5p in 2007 – then the credit crunch hit. They have recently rebounded to 287.5p on eye-catching financials and strategic deals, among them the upping of its stake in California-based Kx to 20 per cent, for £4.7 million.

Trading on only nine times forward earnings and yielding 3.5 per cent, First Derivatives, which generally beats forecasts and has yet to issue a profit warning, offers first-class value.

Business booms at Brady
Commodity trading software provider Brady, winning significant deals and having grown half-year profits 42 per cent to £309,000, should also be on your radar screens.

Brady, which increased sales 76 per cent to £3.7 million in the first half, ended the period with £6.2 million cash and has encouraged with recent news. It has inked a new licence contract to supply software to the metal trading arm of Xstrata Copper and announced that Standard Bank has become the first to use its new interface to the London Metal Exchange’s trades matching system.

Up from a 52-week low of 40.5p to 72.5p, Brady shares sell for a pricey 20 times forward earnings, though they should have further to go. Buy.

Lombard – unloved, for now
Unloved by investors, for now at least, is City-headquartered Lombard Risk Management, whose prospects are being revitalised under CEO John Wisbey and recently recruited numbers man Keith Butcher, who as finance director of Datacash, helped swell its market cap from £8 million to £300 million.

Lombard’s products improve the management of collateralised trading and regulatory compliance across a client base of more than 250 banks, hedge funds, fund managers and commodity trading firms including Northern Trust, Dresdner Kleinwort and BNY Mellon Asset Management.

Lombard claims to be global number two in collateral management software, where its COLLINE product offers growth potential in the US, the UK and Europe. And it claims a leading position in the UK market in FSA bank reporting, where its regulatory reporting and liquidity management tool is well placed to capitalise on the clamour to overhaul light touch regulation.

The tiny company lost £1.25 million in the year to March, but the bulk was in the first half and caused by issues in the since-restructured regulatory compliance business. Sales trod water at £8.7 million (2008: £8.46 million), though behind the scenes there were major wins and maiden profits for the COLLINE business, and cost cutting has left Lombard fighting fit.

A recent £2.83 million share issue not only eliminated director loans, it introduced Legal & General and Gartmore onto the register, and I am encouraged by the fact the board subscribed for £1.06 million of the issue total.

At 4.5p, down from an AIM peak of around 14p, Lombard represents an intelligent recovery bet on rising regulation in the banking markets as well as Butcher’s influence.

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