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Avoid Sophos as private equity heads for exit

Data security company is suffering from a slowdown in sales, as currency movements add to its woes, says John Ficenec

176.2p Questor says -30p AVOID

EVER since Sophos became the UK’s biggest ever technology flotation in July last year it has struggled to justify its valuation.

Its shares tumbled almost 15pc yesterday as the computer security firm demonstrated a worrying slowdown in sales. Hruska and Peter Lammer, failed to list Sophos in 2007 and 2009, due to tough market conditions before and after the financial crisis. The pair eventually sold a 70pc stake to US private equity group Apax for £372m in 2010, giving the company a total valuation of about £530m.

Apaxwould have liked to sell Sophos to a company such as Hewlett-Packard or Dell. However, a trade sale failed tomaterialise and it was taken to market instead.

The stock market listing in July last year, at 225p per share, valued the company at £1bn and allowed Apax to cut its stake to 40pc. The rest of the float raised about $100m in cash net of fees. The majority of that money was used to reduce the debt pile from $319m to about $220m. Apax sold a further 60m shares, worth about £150m at 250p per share, on the market in December to cut its stake to 22pc.

The shares have fallen 26pc during the past threemonths and arewell belowtheir 225p float price.

Questor is struggling to find reasons to buy shares in this overvalued and loss-making companywhile private equity makes for the exit. Avoid. be concerned about the UK housing sector in general.

There is no doubt Redrowis performing incrediblywell. Revenue increased 8pc to £603m, and pre-tax profits moved 14pc higher to £104m during the six months to the end of December; the housebuilder made more profit in six months than it did in thewhole of 2013.

The company has also sidestepped theworst of the slowdown in London by focusing on developments in the commuter belt around the capital.

The second half of the year is underpinned by a record order book of £655m at the end of December, up 51pc on a year earlier. The long-term outlook is secured by a land bank with space for some 21,400 homes, or about five years’ worth of building given the current target for 4,700 completions in the year to the end of June.

However, the housing market moves in cycles and this current state-sponsored boomis looking particularly long in the tooth. The impact of help-to-buy and easy mortgages is coming to an end. What’s more, an increase in stamp duty on second homes and a tax grab on buy-to-let is cooling demand.

Revenue growth of 8pc in the first half was down from 54pc at the same stage last year, and profit growth of 14pc, while impressive, was down from a 92pc increase at the same stage a year ago. The reason is that house prices are flatlining, with the average house price edging up just 2pc to about £306,000 at Redrow, which is less than half the 14pc jump in house prices at the same stage last year.

Questor recommended selling housing shares in August last year, andwe reaffirm that advice. Sell.





Daily Telegraph