RJH writes...Update: these opinions ought to be read alongside this. This is the end of the line for the CEO, a positive for the shares. However, please read the first comment against this post below for a well-informed alternative ending.

As the dust settles from this morning's announcement iSoft plc stands market capped at £144m with revenues of £200m. Its shares change hands at 60p. The degree to which the iSoft brand has suffered is not obviously quantifiable making estimates of revenue growth even less fruitful than usual.

However, net asset value (NAV) per share at the last balance sheet photo was about 210p - but before assessment of the revolving debt facility, cash burn, backed out revenues and the mooted goodwill impairment. Unkind, back-of-an-envelope calculations suggest that NAV might more correctly be sitting somewhere between 75p and 100p per share. A software firm without important questions hanging over its management's ability and its finance structure would enjoy a premium of 2.5 to 4 times that.

The key to recovery is management's focus on fixing and retaining the Accenture-led NHS contract. In its favour, high profile utterances from the health department suggest they blame Accenture, not iSoft, for the delays.

That lessens the odds of iSoft being removed from the project - which bodes well for a healthier liabilities position and ratings recovery. Nonetheless, one must wonder about a company whose restated accounts show it profitless for at least the last three years.


NB: An aside - the restatement may allow recovery of or credit for prior year tax bills which since 2003 have totaled £5.5m, £6.8m and £19m. The group need to bring in capital - the main reason they sold the Swiss operations last month - and clawing back tax paid is the most lucrative of the obvious options available (the others being freehold property sale/leaseback and the redundancy programme).

The writer owns iSoft equity.

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2 comments

  1. Paul Murphy // 9/14/2006 06:02:00 PM

    As ever your analysis of Isoft is rivetting, but on this occasion are you perhaps focusing on secondary injuries/remedies when this particular corporate patient has just been hit on the head with a club.

    Whatever the "true" position of Isoft's balance sheet and its need for cash, the market is already betting that the firm has no option but to raise fresh equity -- and that is not going to be done at 60p or even 40p. Despite the quality of Isoft's City (and legal)advice I can't help wondering whether this stock will go into a death spiral -- bears selling in the near certain knowledge that they can fill their positions when the rights issue arrives.

    The crutch for the price (or danger for the bears) is the possibility of a bid. Today's bounce was bear closing -- but they are bound to come back, having already made so much easy money on this company.

    Tax clawbacks and focusing on the NHS contract relationship are all very well. But other, more immediate forces will make that impossible.

    (And no, I don't have an economic interest in this company, either way.)


    paul.murphy@ft.com

  2. RJH Adams // 9/14/2006 06:03:00 PM

    iSoft are probably £40m cash flow short per year for the next three years because of their imprudent past use of customer prepayments. It may be too big a hole - I don't know.

    But I'd suggest that the short positions being taken on the shares owe at least as much to no confidence in Mr Whiston and his CFO as to the real operational situation and the possible need for a rights issue.

    Had the CEO resigned/been sacked this degree of negative sentiment, probably, would have been avoided.

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