Tech watch by Elliott Davis

After a storming six months, locating value in the software sector is no longer as easy as it once was. But I've found three companies that I believe are still fundamentally under-valued

First recommended by Growth Company Investor at 8.5p in February 2004, IT consultancy SiRVis IT has struggled to make much progress. Indeed, the 10.3 per cent rise over the past year does not do justice to the improvements wrought by chief executive Mark Lewis and his management team.

Formerly a struggling developer of educational materials, the company's prospects changed significantly following the acquisition of profitable IT services group Linetex in January 2004. The impact of this deal was immediate, a fact reflected by the latest interims, to 30 November, which showed sales surging from a lowly £528,000 to £3.9 million and pre-tax profits doubling to £345,000.

Some 75 per cent of next year's IT support revenues are already contracted and it's interesting to note that both the Discovery Trust and Bill Brown's AIM VCT 2 have recently secured significant stakes, purchasing 4.4 per cent and 7.5 per cent respectively.

Although full year analyst forecasts are currently unavailable, a sub £11 million market-valuation leaves considerable room for improvement.

Flomerics passes the test

Flomerics, an electronics analysis software developer, sports a similar-sized market cap (£10.7 million) and is another worthy of your attention.

A difficult few years for the group has seen sales, profits and the share price head south. But, in spite of its various tribulations, Flomerics – which provides software that enables electronics developers to test the thermal and electromagnetic emissions of their creations – has remained profitable throughout and the last set of results, for the year to December, suggest the business may be over the worst.

Worsening US exchange rates ensured sales remained static at £10.2 million during the period, but profits rose 47 per cent to £671,000 and finance director Chris Ogle says that the company's most recent software releases 'are starting to come through'.

To grow both the top and bottom line, Flomerics is hoping to exploit the economically expanding Asia/Pacific regions. 'China is a potentially huge market that we're only scratching the surface of right now,' Ogle explains, 'and our revenues are not that great yet from India either.'

In addition, the company's latest software launch, which is aimed at printed circuit board (PCB) developers, is expected to see 'good growth in 2005', with Ogle believing that there are far more customers for their PCB product than for their existing thermal analysis product. To capitalise on this market, the former will be sold at a lower price point.

Although veteran chief executive David Tatchell will step down later this year, analyst Adam Lawson from house broker Teather & Greenwood remains a firm supporter of the stock – forecasting a profit of £900,000 this year, from £11.2 million of revenues. He also predicts a similar improvement in 2006. Add in the £2.8 million of cash in the bank and Flomerics begins to looks decent value at present levels.

Atlantic appeal

My last software pick is resource management outfit Atlantic Global. Now, I'll be the first to admit that it hasn't had a fantastic time of it this last year, but delve a little deeper than the average investor and you will see it has a lot going for it.

Recent interims from the firm saw it nudge sales up nine per cent to £988,000 and profits sliding £110,000 to £121,000 as the figures were affected by a substantial increase in sales and marketing investment costs.

But with a recent trading update indicating that profits for the full year (to be announced on 30 March) will total roughly £360,000, that around £1.9 million remains in the bank and that the 'outlook for 2005 is very positive', the company's current £9.7 million market cap seems a touch miserly.