Share of the week: Software firm's stunning surge

Everyone expected the worst from Fidessa's full-year results, but, in tough markets, the trading systems and software firm's derivatives business shot the lights out instead. Its shares surged to a seven-month high, filling the yawning gap created by last summer's crash following weak results. However, with growth expected to slow and market volatility here to stay, will it hang onto to this week's 30% gain?

Thanks to its derivatives products, growth picked up in the second half of 2015, and a currency benefit helped lift sales and profit 2-4% above consensus forecasts. Growth of 7% took sales to £295.5 million, with 85% of it recurring revenue. The impact of its investment programme and a derivative profits lag meant adjusted pre-tax profit was flat at £39.8 million, giving earnings per share (EPS) of 78p, up 1%.

With Fidessa's cash pile rising 2% to £78.3 million, bosses want to up the dividend by 2% to 25.4p per share, with a special pay-out of 45p, flat on last year.

Its new derivatives business is flying high with sales up 60%, and bosses are confident the division can achieve profitability in the next three years. While the business will continue to grow, it won't enjoy the beginner’s momentum of this year, especially as it tries to play catch up after losing its Jefferies contract - this is expected to reduce revenue by around 2% in 2016. Management also want to begin its fixed income investment this year, which will delay profit growth for another 12 months.

Fidessa shares rocketed 30% to a seven-month high this week, leading the FTSE 350 risers.

With Investec pencilling in earnings per share (EPS) of 81.8p in 2016, the shares are trading on a hefty forward price/earnings (PE) multiple of 28 times. Barclays thinks 20 times is generous enough and keeps its price target at 1,860p. This week's rally has also pulls the prospective dividend yield down from 4.5% to 3.7%.

"We believe [this] is insufficient to compensate for the financial utility nature of the stock," explains finnCap analyst Andrew Darley.

So, with this year's spectacular growth set to stagnate and against an industry backdrop as turbulent as ever, is Fidessa too bullish pencilling in 4% growth at constant currency for 2016?

Barclays' reckons so: "With derivatives held back and the customer consolidation headwind increasing, this requires a material step-up in core equities new business."

"Fidessa can justify a premium rating, in our view, given the defensive nature of its recurring revenues, the unrealised value in its derivatives product line and the fact that revenues are beginning to grow again," analyst James Goodman explains. "However, there the premium versus the sector currently is simply too great for the modest earnings growth."

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