Buy iSOFT at 351p
Suggests Rob Cullum of Trendwatch.co.uk
TrendWatch last recommended the world-class healthcare software developer iSOFT Group almost exactly a year ago. You now have the opportunity to buy at a lower price than a year ago.

The first thought that might strike you is that this can't be a very good company if the share price has gone down over a 12-month period. In fact, the share price has been held back by a small dip in earnings last year caused by the raising of extra shares to pay for the all-share merger with former rival Torex, which created the fourth-biggest software company on the London stockmarket. There were also a couple of other small glitches that unsettled investors, which we'll come to later. But those are now water under the bridge. The company is powerfully positioned in its market and earnings are set to grow strongly over the coming years.

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iSOFT's fortunes are very much bound up with those of the NHS, into which the government is pouring billions. One of the government's many targets for the NHS is to ensure that patient information is available at the point of care through the deployment of a broadband network infrastructure, mobile computers and specialist software. iSOFT is at the very forefront of these developments. Even better, iSOFT's software and systems are deployed not just in the NHS but to about 7,000 healthcare organisations around the world, public and private.

Up to 2002, it had four main competitors: McKesson HBOC of the US; Siemens of Germany; and Torex and Northgate Information Solutions in the UK. But in 2002, it acquired NIS's healthcare unit for 33 million pounds. In September 2003, iSOFT and Torex agreed an all-share merger, valuing Torex at 337.5 million pounds. ISOFT therefore no longer has any significant UK-based competition.

This was a highly synergistic deal, as Torex was strong in delivery of computer-based management systems to general practitioners, and also had significant operations in Europe. The merger is generating annual recurring savings of 12.2 million pounds.

Until recently, iSOFT's core product was its i-series software. But now it is busy rolling out its new flagship range Lorenzo, much of which was developed at its centre in Chennai, India. This centre currently employs 1,000 programmers, engineers and support staff. ISOFT recently announced that it was establishing a second Indian base, this one in Hyderabad, employing a further 200. These offshore operations give iSOFT a big competitive advantage by dramatically lowering the cost of developing innovative software.

Lorenzo is built to international standards and open (as opposed to proprietary) technologies. A health organisation such as a hospital can plug together modules that integrate all the required healthcare functions and departments: patients and clinicians records, hospital bookings and appointments, GP records, prescriptions and pharmacy records, laboratories, X-ray and other scans, home care and so on - even to the extent of making patient records available on a personalised web page so that they can be viewed by the patients at home.

The software is designed to be intuitive to use, minimising the amount of training required. It can be run as a hosted service by third-party IT firms. The information can be accessed via PCs (desktop and portable), handheld computers, digital television and mobile phones. Clinicians can consult electronic patient records during their ward rounds; family doctors have instant access to discharge summaries; and community care employees can update case notes during home visits.

This is a tremendous advance over the situation that prevailed in the NHS until relatively recently, where a plethora of different systems was installed in different hospitals, with none of them able to talk to each other.

To its credit, the Department of Health not only recognised the problem but drove the solution. It split the UK into 5 regions and awarded massive IT integration contracts to a consortium in each region that will supply that region's IT needs. This is the biggest civilian IT programme in the world. Lorenzo's patient information can be shared between regions on a national basis, including the two regions that do not use Lorenzo.

The leading companies in each consortium are the integration giants such as BT and Accenture. Accenture is reporting huge losses on the contracts for the eastern and north-eastern regions, which scared the pants off iSOFT investors - until analysts pointed out that, so long as iSOFT meets its deadlines, it would continued to get paid.

And how much would that be? ISOFT has won the patient records software contracts in three of the five regions. This gives it an estimated 41 million a year in licence fees and installation services between 2004 and 2008 inclusive; and 19 million pounds a year in maintenance fees between 2004 and 2014. These figures represent about 10% of the total fees of the three consortia. However, because iSOFT's Lorenzo is likely to pick up software contracts other than patient records, UBS Warburg reckons it could finish up with 20% of consortia revenue.

It doesn't stop there. ISOFT's earlier products are already deployed with 6,500 customers in 17 countries on all five continents. It's especially strong in Germany, Holland, China and Australia; and it has a US marketing agreement with US medical business Eclipsys. Thanks to a partnership deal, Microsoft packages Lorenzo for marketing to third-party organisations in the UK and overseas. This will help spearhead Lorenzo into new overseas territories.

One issue seems to have dogged the share price for years: accounting issues - when revenues are booked and the like. We thought these had long ago been buried. Sadly, old suspicions flared up again in December, when its finance manager resigned after less than a year in the job, having completed the integration of Torex. This really does seem to be a tired old issue. The company vehemently denies that the FD's departure was anything to do with accounting issues. More importantly, brokers' analysts (whose job it is to go through the accounts with a fine-tooth comb) concur. Morgan Stanley, for example, says it has no particular concerns.

The company's financial track record over the years has been superb. Turnover surged from 11.1 million pounds in 1999 to 149 million pounds last year. In the same period, profits surged 23-fold from 0.75 million pounds to 17.6 million pounds.

However, it seems that this is only the end of the beginning. Brokers forecast that normalised profits will swell from 28.9 million pounds last year to 66.1 million this year and on to 78.7 million pounds in 2006. Earnings won't grow quite as fast. Nevertheless, they're forecast to grow 60% this year and 14% in 2006.

That gives a forward p/e of under 15.5, slightly lower than its sector. Given its projected rate of earnings growth, it should trade at a substantial premium.

Its last set of results was the interims issued in mid-January. They were impressive and ahead of expectations. Group turnover grew 130% to 93.5 million pounds. Pre-tax profit fell from 6.65 million pounds to 4.91 million pounds because of goodwill amortisation. Profits before goodwill amortisation shot up 87% to 18.2 million pounds. These interims were all the more impressive given that its revenues are weighted to the second half of the year. ISOFT's next trading update will be issued in a couple of weeks, on 12 May. If the update is as good as we expect it to be, the shares could start to move ahead strongly. Having underperformed the market over the past 12 months, they have some catching up to do.

The chart shows strong support at around 324p, so this should represent more or less the extent of the potential downside - unless, of course, it issues a profit warning out of the blue, which doesn't look very likely.

As for the upside, that's anybody's guess. Morgan Stanley's guess is that the shares are worth 520p. But, as we said earlier, we reckon the price needs to catch up with events - it's rated way below its US peers. BUY.

Key Data

EPIC: IOT
Price: 351.75 - 352.25p
Market : Main market
NMS: 25,000

i suggest a re-read of the postings relating to ISOFT
a warning to all that one is so often trusting greatly the directors of the equity body