Gamble of the week: undervalued software house
By
Paul Hill May 29, 2009
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Despite the advent of the paperless office, many private and public organisations are still weighed down by mountains of red-tape and form-filling – and it's getting worse due to government requirements for greater transparency, corporate governance and accountability.
So what's the answer? Traditionally, it meant employing teams of data-entry clerks to re-type information from forms into multiple IT systems, and then archive the lot. Not any more, thanks to Kofax, whose 'Intelligent Capture & Exchange' softwear processes written text and digital files, enabling businesses to cut out much unnecessary human intervention.
Kofax (LSE: KFX)
Not only does this save a bucket load of cash, but it also enhances customer service, improves accuracy and speeds up retrieval times. This global $1.7bn market is expanding at a rate of more than 7% a year, and Kofax is the world leader, with a market share of around 11%. The group supplies blue-chip customers, including HSBC, Shell, and Ford, in addition to partnering with computing giant Hewlett-Packard.
The City expects sales and EPS of £182m and 12.5p respectively for the year ending June 2009, rising to £187m and 13.7p in 2010. That puts the shares on undemanding p/e ratios of 9.7 and 8.8, which, if the dilutive effect of its £31m cash hoard (worth 36p a share) is stripped out, falls to around eight.
I think this is way too low – instead, I value the stock at around 170p per share, or some 40% above today's levels.
So far so good, but what are the potential bugs? Well growth is undoubtedly being affected by the current macro-headwinds, particularly in the financial services space. Competition from the likes of Oracle, IBM and EMC is hotting up in the more cut-throat areas of batch-archiving and digital scanners. That said, Kofax possesses a rock-solid balance sheet; it has the leading technology in an expanding niche market; and as a final reason to buy, it could well be taken-over at current depressed levels.
Recommendation: Speculative BUY at 121p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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