Thrifty Anite tests resolve

In practice: A little patience, a lot of profit Anite (AIE) presents something of a dilemma. The figures are very enticing. For financial strength, the company scores a perfect nine. It’s cheap too, the share price is just eight times its average profits over the last ten years. Beneath lies a more complicated story, though. The company engineers and licenses software. It’s main focus is testing mobile ‘phone handsets and networks. About a third of its revenues, and a slightly larger proportion of profit comes from software for the travel industry, managing reservations, administration, accounting and marketing for tour, cruise, ferry and rail companies. Both businesses serve big names in their sectors, Vodafone, Samsung, Thomson/First Choice, and TUI/MyTravel for example. By licensing the software, implementing it, managing it and sometimes hosting it, Anite reduces the time it takes to develop new mobile ‘phone models, monitors and analyses the performance of mobile phone networks so operators can increase efficiency, and automates holiday and travel bookings. But for the last two years earnings have been running at about half the level they were in the previous eight years, and management expects them to dip again in the half year to October. A decline in earnings is often a good reason to consider a company for investment, if it’s likely to be a temporary decline. That’s when investors can profit, buying shares cheaply, as others with less patience sell. A little patience can lead to a lot of profit when a company recovers. In its annual report, and a statement in September, Anite gives a number of plausible reasons for a temporary decline:

1. Recession in the mobile and travel industries, and reduced investment by customers.
2. Lost sales when TUI took over another customer, MyTravel, and when two customers, First Choice and Thomson, merged.
3. The delayed adoption by mobile phone networks of 4G LTE, the next generation data network.

It is a sign of strength that Anite is still profitable while telecoms and travel are in recession, and customers are holding back on investment rather than expanding. But there is room for doubt. Anite is investing in 4G LTE, which will compete with wireless network hotspots for mobile internet users,  and the company admits there’s no way of predicting the take-up of the next generation handsets it will test. It plans to regain lost revenue from tour operators by persuading customers to upgrade to its newest system and annual licenses. We don’t, of course, know to what extent this will happen. More scary, perhaps, is Anite’s evolution from what chairman Clay Brendish describes as a “troubled and fragmented IT services company’ to a ‘focused international software company’, a deliberate strategy that seems to have frustrated investors because it’s taken so long. It might not be over. While Anite touts the growth prospects of its testing divisions which it thinks are less open to competition, it’s more sanguine about travel, and may sell it off, as it sold Anite Public Sector in 2008 and Anite International, ten overseas IT consultancies offloaded from 2004. Shrinking is often good business, if a leaner, less indebted, more profitable company results. Anite’s F_Score suggests that it could be all of those things, it’s certainly stronger than it was last year, but the fact that it is a different business, it acquired Nemo, its network testing division, in 2006, means its long-term earnings record is not very useful as a guide to future earnings. Since that’s the basis of Anite’s low ten year price earnings ratio of about eight, I have less confidence in its apparent cheapness than its financial strength. Based on its more recent record, its price earnings ratio is more like twelve. Nevertheless, I think  the mobile telecoms and travel industries have a profitable future so two of the three foundations of a good investment are in place. The company’s financially strong and its businesses seem viable. The third, its valuation, is more speculative, but the shares could be in bargain territory and if they’re not, I doubt they’re overpriced.. Sometimes you can’t have everything, and although Anite’s shares have a mountain of worry to climb, they’re going in the Thrifty 30 model portfolio at Friday’s close (35p). Notes:
First transaction: 9 September 2009
Valuation date: 1 October 2009
Cost includes £10 broker fee and £5 stamp duty
Cash earns no interest
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