Success in the palm of their hands

Smaller Companies

THE booming hi-tech sector in the US has been well-documented. But the UK has technology stars as well, and they look cheap by US and even European standards.

Two that look full of potential despite recent strong share price moves are Misys, the software applications group, at 589p, and Psion, the palm- top computer specialist, at 599p.

Misys has been built largely by acquisition and has some characteristics of a highly focused conglomerate. Kevin Lomax, the chairman and founder, spent some time at Hanson as well as the telecommunications giant ITT. Floated at 95p in 1987, as a minnow with sales of pounds 3m and profits under pounds 1m, the group has grown out of all recognition, with the current year's turnover and profits expected to reach around pounds 300m and pounds 48m-plus respectively.

But the ride for investors has been a bumpy one. In 1991, after a spectacular rise over the previous three years, pre-tax profits halved to pounds 5.6m. Despite a continuing rising trend in the dividend, investors feared that another 1980s star was going to burn out, and the shares fell from a peak of around 450p to a 1991 low of nearly 70p. A profits recovery took the price up to 550p in February last year, only for the shares to plunge again to nearly 300p in March this year, on worries when the group doubled in size by acquiring fellow software group ACT for pounds 193m.

The shares have begun a strong recovery, as investors have come to appreciate the group's strengths as a well-run applications software business with world-class potential. Doubts about the ACT deal have faded, following confident statements by the Misys board. Like Williams Holdings (see Blue Chip), Misys sends in high-powered taskforces to sort out acquisitions.

The group specialises in the financial services industry. Its origins are in supplying software for insurance brokers and other financial intermediaries. But increasingly it is moving into more on-line services, generating higher- quality recurring income. A similar shift could come with its substantial business supplying information technology to the banking and financial services industry, where it has become a world leader since the ACT acquisition.

On forecasts of earnings reaching 42p this year and perhaps close to 50p for 1996/97, the price-earnings ratio will soon be heading down towards 10. That looks excellent value for a business that is generating cash at a furious rate.

An even more potent mix of risk and reward is offered by palm-top Psion. The company and its share price suffered a setback in 1991, when the transition from the old (and still in production) Organiser to the Series 3 product forced the company into losses. Since then, profits have rebounded in spectacular style, doubling in 1993 and 1994 and up by 76 per cent in the first half of 1995, despite sales being held back by a shortage of memory chips.

David Potter, the founder and chairman, makes no secret of the riskiness of the field in which he is operating: the competition has deeper pockets and the products are constantly changing. But the opportunities are equally spectacular. The latest Series 3a palm-top computers have in effect a thousand times the power of the first Organiser, with a vastly improved range of accessories and features, but they do not cost much more.

The scope is close to mind-blowing. Dr Potter claims his machines are more powerful than those of either Sharp of Japan or Hewlett Packard of the US. This helped Psion to take 23 per cent of the world market last year (more this year). An independent research body forecasts the global market for palm-top computers reaching 6 million around the end of the decade, and growing strongly thereafter, from just l million in 1994.

The shares have more than doubled since March, which might suggest the best of the fun is over. But Goldman Sachs' forecasts for 1995 imply a p/e of just over 20 for this year, falling to 13 by 1997 - cheap by US and European standards of valuation. I also expect the forecasts to be beaten, with the chip shortage gradually easing. The risks are obvious, but more than matched by the potential.