Financial Objects eyes fruitful future

The successful integration of two acquisitions has transformed the fortunes of software house Financial Objects, giving the now-profitable group a wider suite of products to sell, a broader range of clients to target and a healthy forward order book.

Like all small company survivors, Financial Objects has a colourful history. For the first ten years of its existence it was purely a banking software provider, offering front and back office products to around 600 customers. This was a nice line of business that unfortunately peaked in 1999, from which point the group drifted into losses.

However, in May 2005, the company acquired Wealth Management Software, following this up in March 2006 with the purchase of risk management software supplier Raft International.

WMS has broadened the customer base in the financial services sector and provided Financial Objects with software it can cross-sell to its existing customers. The Raft purchase added to the group’s range of risk management products, a growth area because of the increased emphasis on compliance. Raft’s particular area of expertise is in risk software for energy and utility companies – two buoyant sectors.

In addition to all of this, Financial Objects has a software development centre in Bangalore, the city known as the Silicon Valley of India. This started trading three years ago and staff numbers have increased to more than 130, with the lower cost of development helping the group to compete.

In the six months to June, turnover increased 87 per cent to £10.5 million and profit before amortisation and exceptionals increased from £251,000 to £1 million. Even stripping out the effect of the acquisitions of Wealth Management Software and Raft International, organic sales growth was 20 per cent. Recurring revenues made up two-fifths of group turnover.

First-half growth was mainly down to a strong performance from banking software. That improvement does not look repeatable in the second half. The growth will come from the other activities in the rest of the year.

The Raft energy risk software business made a loss in the four months it was included in the first half. But it signed a large contract in June and this, as well as other imminent contracts, will help the business perform more strongly in the rest of the year. WMS also signed up customers that will generate more revenues in the second half. There was a problem with a contract won just after WMS was acquired, but management has apparently learnt from this mistake.

As things stand, the group order book is worth £13.5 million, with Raft accounting for £2.5 million of that. Net debt was £223,000 at the end of June but the group should return to a net cash position by the year end. Raft’s Danish consultancy business appears non-core and if it were sold it could further boost the cash position.

Underlying profits are forecast to almost double from £1 million to £2 million in the full year. Profits could rise to £2.6 million in 2007. Financial Objects also has £11 million of
tax losses, so it won’t be paying much in the way of tax for the foreseeable future.

Broker Evolution believes tax losses alone are worth 7p. And the shares trade on less than ten times forecast earnings for 2006 – based on a nil tax charge – falling to eight in 2007. There is also the chance of a dividend for the first time since 2003. A 0.5p a share payment would give the shares a 1.1 per cent yield and acquisition benefits will show through over the next couple of years. All of this should prompt a re-rating. Buy.