CHANNELDEX: One tough month

CHANNELDEX: One tough month

By all accounts, the last month has been a sour one for ASX-listed IT companies. The effects of the WorldCom crisis and general market caution in the United States might have been less severe in Australian markets generally, but local IT stocks have shown much less resilience than their blue chip peers.

Analysts consider the last few months to be one of the toughest periods the local IT sector has ever had, especially if one takes the movement of share prices as an indicator. In times of share market volatility, there is a ‘flight to quality' which sees investors either pull out of the stock market altogether or transfer their funds into large established companies. Those that remain in the stock market also tend to avoid any small cap companies, especially in sectors of the market that are travelling poorly. Subsequently, IT&T stocks, considered high risk at the best of times, are getting discarded in favour of stocks that offer a return on less risk.

While analysts studying the local PC market are starting to see signs of encouragement, the performance of local IT stocks on the ASX would suggest there needs to be a substantial growth in sales before investors reconsider them. It is expected that somewhere between the end of this year and the latter part of 2003, PC sales should improve due to the Y2K refresh cycle effect. It is presumed that those companies that have not upgraded their machines since just prior to the change in millennium are probably due to by then.

Suppliers of PC and IT infrastructure in general are not showing such signs of recovery. The value of KAZ Computer Services, one of the largest IT infrastructure stocks in the country since its acquisition of Aspect Computing, has plummeted in recent months. Earlier this year, the company was trading at close to the $1 mark, but has since fallen to less than 25c. It is only in recent weeks that the value of KAZ's stock looks to have settled.

Hire Intelligence, a relatively small company that focuses on the leasing out of IT infrastructure to the small business market through a network of franchisees, has also taken a tumble on the stock market. The value of Hire Intelligence's stock has fallen by around 88 per cent. Investors showed little appreciation for the IT leasing company's value after it warned the market it would not meet its original earnings expectations.

Other IT infrastructure providers such as Volante, Data#3, Optima and Quadtel continue to trade steadily but most are among some of the lowest valuations of any stocks listed on the ASX. IT distribution player Quadtel, for example, might be racking up some significant revenues but investor caution has it trading at between 2c and 3c. There are some exceptions, of course, with Commander making slight gains after announcing its acquisition of HP reseller Centari Group.

Software groups are suffering a similar fate. Technology One is trading at half the value it was earlier this year, and similar stories appear at accounting software vendor MYOB and professional services software vendor Solution 6.

Also of concern is the number of IT&T companies continuing to burn cash. Of the 100-odd listed companies that Commonwealth Research classifies as IT stocks, 40 are still required to provide the Australian Stock Exchange with quarterly updates on their balance sheets. Out of these 40 companies, 22 were still shown to have been burning cash over the last quarter.

Among the cash burners is integrator eGlobal, a company with a diverse range of IT software and services, which looks to have little more than another quarter left in it unless its directors can pull something out of their hats.

Then there's eSec, whose predicament on paper looks a little less startling. Nevertheless, it is interesting to see that a managed service provider, specialising in security at that, is still not achieving very positive results. Another managed security service provider, SecureNet, has had its stock price plummet for a number of months, although in recent weeks it has made some sort of recovery after announcing a few solid deals.

Again, other solution-centric companies, such as Oakton and SMS Consulting, continue to trade steadily but are not nearly as robust in terms of stock price as they were six or 12 months ago.

Analysts predict that times are only going to get tougher as the US market slows in coming quarters. It should be especially difficult for companies that rely heavily on exporting their intellectual property/products to the US. But if IT spending picks up by about 5 or 6 per cent next year, as predicted by industry analysts, the market might start to be a little more forgiving.

Commonwealth Research analyst Ross McMillan contributed to this report.

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