STOCKS - Short, sharp share

Are resellers misunderstood and undervalued? Could they do more to persuade the City they are a good bet and deserve a higher share price valuation? Computacenter's first year on the London Stock Exchange shows that it's a tough life in the public eye.

Computacenter has just passed its first anniversary as a listed to persuade the City they are a good bet and deserve a higher share price valuation? Computacenter's first year on the London Stock Exchange shows that it's a tough life in the public eye. company on the London Stock Exchange, but in that short time it has experienced a dramatic share price ride.

It joined the market in May 1998 in what was acclaimed as one of the UK's most successful share issues this decade. On flotation, it was valued at £6.70 a share - the top end of the proposed range - but was still more than 10 times oversubscribed. The share price then rocketed upwards and peaked at £7.83 last June, but has since zig-zagged pretty much downwards, briefly broken by an upward surge at the start of this year to a high of £6.45. By mid-May, the shares were valued at about £4.45, giving Computacenter a market capitalisation of £788 million.

Other resellers have also suffered a downward slippage in their share prices. Morse, the most recent reseller to enter the London Stock Exchange, has seen its share price deflate since its arrival in March from £2.50 to about £2.26.

Compel, the elder statesman of listed resellers by reason of time on the market if not size, has also been affected, despite a respectable share price history since its flotation in September 1994. Its share performance graph since then has followed a generally upward path.

But Compel was hit by the share slump in the late summer and autumn of last year, then recovered until early spring when it hit £4.82, its high so far, and almost as good as its all-time record of £4.92, achieved before the market collapse last year. But its share price too, has once again been on a downward path in recent months, reaching about £4.47 by mid-May.

All resellers have suffered share price slippage, but the impact must be most shocking for Computacenter, given its highly successful market launch. With one year on the stock market under its belt, how does the management team feel about life as a listed company?

'It's been a bit of a rollercoaster,' admits Phil Williams, head of corporate marketing at Computacenter. 'We floated at the top of the market, which is good because we raised the maximum amount of capital we could for the company.'

Any company joining the market goes through a rapid learning curve, and Computacenter has been no exception. 'You have a completely different audience to worry about,' he says, referring to analysts and shareholders.

The firm is also finding the low share price frustrating. 'In the past year, Computacenter has put in two really exceptional sets of results above market expectations, but despite that we have seen the share price come down,' Williams adds.

These results were the interim and final accounts for 1998, the latter being announced this March. Computacenter reported pre-tax profit up 37 per cent to £64.6 million for the year ended December 1998, with sales up 40 per cent to £1.6 billion. Williams feels the share price issue is particularly important for Computacenter because of its high level of employee share ownership in line with the company's desire to encourage long-term staff loyalty. Although the proportion of employee share ownership has fallen slightly over the year, it is still above the industry average, so a depressed share price is particularly unwelcome.

So why has the share price been so subdued? Williams claims the stock market likes to polarise businesses, with box-shifting distribution businesses placed at one end - the low value end - and service businesses, the consulting businesses, put at the other, high-value end of the spectrum.

'Our business is in the middle, so we have suffered a bit,' he says.

'We have been pigeon-holed as a box-shifter, which we are not.'

But Computacenter hasn't helped its argument by failing to split out the service element of its revenue from the reseller element, thus doing nothing to reduce City suspicions about how much of its business really is high value. But Williams says this is simply because splitting out the service revenue is virtually impossible to do, explaining that a sale to a customer can involve a whole range of products and services.

'They are wrapped up as one sale, with one price,' he says. 'To say what proportion comes from the consulting side is hard to break out, so we don't do it.'

But, as Computacenter knows through experience, persuading the City that the business isn't just box-shifting requires a concerted, sustained communications effort. 'You have to have a clear understanding of where the business is going, what it is all about and what type of customer you have,' says Williams. 'You have to make sure that is communicated very clearly. It's a complicated business so we have to continually beat the drum and say, "This is what we are".'

The company meets with analysts at least four times a year, according to the timing of results announcements, as well as holding ad hoc meetings to respond to specific requests for information. 'We offer in-depth information and talk about what we are doing,' says Williams.

Emma Griffin, an analyst at HSBC, believes understanding of the reselling business could improve with time, given repeated solid financial results.

'When Computacenter came into the market last year, it had a big job explaining what it does,' she says. 'There is a misconception as to where it make its money. The market finds it quite difficult to understand and that translates into lower valuations than some other companies have. Resellers are perceived to be lower quality rather than lower growth, and that is the main issue. When Computacenter manages to produce the kind of figures we expect on an on-going basis, not only just after flotation, then I think people will come onboard.'

Meanwhile, Computacenter's management team is trying not to get too fixated on the share price disappointment. 'You can get distracted by the share price,' Williams admits. 'You can end up doing things for the short term which aren't in the long-term interests of the company. We have taken the long-term view and focused on achieving strong business performance over time. We focus on growing the business and on delivering results to shareholders. Having said that, one of the challenges of being a plc is communicating the value of the business.'

If Computacenter has been on a learning curve, Morse is also learning from its life as a public company. But its experience has been different from the start. Morse, primarily known as a Sun Microsystems and Hewlett Packard reseller, floated at the end of March. The actual event followed rumours that it had been heading for the stock market much sooner, but that the market collapse had ruined its plans. When Morse finally floated this year, its shares were priced at the bottom end of its target range, at £2.50 a share, and the number of shares offered was reduced by about a third, reflecting the tougher climate for IT firms.

'It wasn't the easiest of markets but the float got away successfully and was oversubscribed,' says Mark Byatt, marketing director at Morse.

'The process was very time consuming and involved most of the senior management team in the build-up to it. We were very glad to get that out of the way and get back to the business issues.'

Although the company's share price has slipped since flotation, Byatt isn't too dispirited. 'If you look at the sector as a whole, we are pretty stable and the volume of trading has been low.' The management team still sees the flotation as having been the right thing to do. 'It gives us the potential to grow organically and by acquisition,' he adds.

Morse announced its plans to purchase Partner System, a Paris IT company, before the float, reflecting its ambitions for European expansion. 'There are other opportunities we are looking at,' says Byatt. The company does have hopes for growth and lies between Computacenter and Compel in terms of size. For the year ended June 1998, Morse achieved a turnover of £216 million and operating profit of £20.5 million, followed by interim pre-tax profit for the six months ended December 1998 of £12 million.

Morse is wisely paying attention to its communications with the City.

'Our approach is to be very realistic about the type of business we are in,' says Byatt. That means making it clear that the business involves a mix of services and reselling, although he says the consulting and systems integration business is growing. 'Those aspects are already quite significant, but we have a greater share in reselling products from our partners.'

The realistic approach has 'gone down well' in the City, Byatt believes.

'The feedback we have had from analysts' presentations has been very positive.' Unlike Computacenter, Morse has split its service side of the business from the reselling. 'We have a very successful reseller part of the business.

We have stated what our business is and where it's going in the future.'

Of all the resellers, Compel has most experience of plc life, having floated in September 1994. 'The City understands the business better than it did when we floated,' says Neville Davis, chairman and chief executive of Compel.

The vendor has been posting impressive results and showing strong growth.

It reported revenue of £121.6 million for the six months ended December 1998, an increase of 40 per cent on the previous year. Pre-tax profit rose 36 per cent to £4.97 million. For the preceding full year ended 30 June 1998, its turnover soared by nearly 90 per cent to £210 million, while pre-tax profit similarly leapt by 78 per cent to £9 million.

'We position ourselves as a service provider rather than a reseller,' says Davis. 'A part of what we do is the provision of systems, but we only do that within the context of a total service. We are not a product business. We are not a box-shifter.'

The message has largely got through to the City, even though it has to be reinforced from time to time, he adds. 'When we first floated it would compare us with distribution companies such as Azlan. But that doesn't happen any more.' Compel is now compared, more correctly, with Morse and Computacenter.

The creation of FTSE's IT subsector has helped to improve understanding of IT companies, and that has helped Compel. 'The separate IT sector has had a positive impact,' says Davis. 'It's increased the generic understanding of IT in the City. More people know about it now. In general terms, I have found that the vast majority of people we have dealt with in the City are very bright and generally understand what we do. What the IT subsector has done is make the starting point of their understanding higher.'

Compel is optimistic and looking ahead to further growth and acquisitions.

'We believe the market we are addressing will continue to grow for the foreseeable future and we can grow, too,' Davis predicts. 'We are more positive than we have ever been about that. We have an active acquisitions strategy and look for takeovers that suit us.'

That said, there are no buys in the pipeline until at least after this June's year end. Loss-making reseller Info'Products, purchased early this year and now trading as Compel IP, was the latest acquisition and one that Compel is hoping to turn around. Things there are going well, says Davis: 'We are progressing. It's performing well against our expectations.'

Resellers, like all IT companies, have suffered some fallout from year 2000 uncertainty. Williams recalls how one analyst summed up his view of the market for IT companies as 'the year of living dangerously'. The impact of year 2000 is 'difficult to forecast', he says. 'But in our report and accounts, we say the net effect is probably neutral.'

Computacenter believes the effect of some clients pulling projects forward will roughly cancel out the impact of others delaying projects until after the start of the year 2000. 'This year is a volatile year,' Williams admits.

'But we are confident about achieving analysts' forecasts.'

Davis has a similar view. 'The impact of year 2000 is uncertain,' he concedes. 'It affects the whole sector, but you have to drill down to see how it affects individual companies.' On the positive side, he believes it is becoming clearer that any impact on the market from the millennium is a one-off blip and evidence is increasingly coming through that there will be plenty of IT business ahead. 'Overall, the prospects for the industry beyond the millennium are very positive. We only work with big customers and can see plans in place for spending.'

Year 2000 aside, perhaps there is more resellers could do to improve the value placed on them by the City. George O'Connor, a research analyst at investment banking group Granville, says resellers are often seen more as box-shifters than value-added service providers. There is a spectrum of perceived value that runs from basic resellers at the bottom, through to Vars, and on to the highest value level of the systems integrators.

'Resellers have tried to move upstream by adding services, such as disaster recovery, but they haven't looked at what is next up the value chain,' he says. 'They haven't taken the very brave move of becoming a systems centre or buying a product. In one leap they would be free from allegations of box-shifting if they took either of those approaches. Systems integration companies are starting to buy product because they see that buying a product gives them technology ownership. Isn't there a role for a reseller in terms of product ownership as well?'

There may well be. The resellers claim to be acquisitive, so maybe they will follow O'Connor's suggestion in the future. Meanwhile, they realise it is necessary to put in the effort to explain themselves to the City.

Compel, which has been doing the job the longest, has support from the competition in this respect.

'We are all in the same sector, so it is in all our interests to make sure the sector is successful and understood,' says Byatt.

Williams agrees. 'In terms of communicating with the financial community, there is a huge task to be completed - and not just by Computacenter, but also by Morse and Compel,' he says. 'It will just take some time.'