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The secret of iomart's success

9th November 2003 · Our Thoughts

The secret of our success by Perry Gourley

BILL Dobbie may have been taking a huge gamble when he forked out £84,000 last year to buy 2.4 million shares in the company he created with business partner Angus MacSween.

Even at 3.5p the price of Iomart shares did not look cheap to investors who had suffered severely in the technology boom. The sector was still depressed and the future looked anything but bright. Few noticed Dobbie’s move into the market.

A year on, nobody is calling his move rash. The shares he bought are now worth £1.15m – a profit of £22,298 a week – enough to make a premier league footballer blush. Dobbie, a graduate of St Andrews University who spent nine years with Unisys before joining MacSween at his former business Teledata, was one of the biggest beneficiaries of what is almost certainly Scotland’s biggest stock market success story.

Iomart’s shares are up 1,300% since last November – an astonishing rise – and the story behind that stellar performance gets even more curious. There has been no news of a technological breakthrough that would revolutionise its market, and the company is still to make a profit. So what has driven the shares to these heady heights?

On the face of it the story of Iomart (share price last week 48p) isn’t all that much different to what it was last November (share price 3.5p) – save a handful of six-figure contracts and a small acquisition. Of course, the general climate for technology stocks is now much brighter than it was a year ago and the Glasgow company has made positive noises about hitting profitability within months.

But that on its own does not explain such a dramatic rise – one which will have left many private and institutional investors who have watched from the sidelines shaking their heads at what they have missed.

Chief executive MacSween, the one-time Royal Navy officer turned telecoms entrepreneur who founded the business, believes the key to the dramatic revaluation is the realisation by investors that Iomart isn’t another technology ‘basket case’. "I think it reflects the fact that people now see we are going to survive when they may not have thought so before," he says. He also cites the fact that a raft of new institutional investors have bought in to the company in recent months as another major reason for the re-rating and increased interest. With interim results due out before the end of the month MacSween cannot discuss current trading, but given positive noises made earlier in the year by the company the figures are unlikely to disappoint.

But he does admit there is a buzz around the Glasgow headquarters of the company where many staff hold shares or options, and have seen their paper wealth soar. With hindsight there have been plenty of ‘buy’ signals along the way for those outside the company. Even those investors who joined the bandwagon as late as this summer could have more doubled the value of their stake.

Those signals began ironically last November when Iomart’s shares hit an all-time low. In the same month it had announced it had cut half-year losses from £3.06m to £1.27m. Even though the company’s cash in the bank was at least twice its market capitalisation, the shares continued to languish.

Early this year more positive news came with talk that the company was close to making a profit on a monthly basis. And then there was no shortage of institutions – including Edinburgh’s Artemis – willing to back an offer at 15p a share in July to raise new funds. But Iomart’s revaluation by the market appears not to have been an unexpected development to those closest to the company – perhaps the strongest buy signal of all. Over the past year four of the five board members have been topping up their stakes in the firm at prices ranging from 3.5p to 20p. Together they have made paper profits of more than £4,000 a day as the share price has continued to soar. Their combined investment of just £153,900 has been turned into £1.74m.

Ironically, the only Iomart board member not to have seen huge profits by increasing his holding is MacSween. His original 30%-plus stake in the business has barred him from buying more shares without launching a bid – a prospect he is understood to have been considering at one point when the valuation was at rock bottom.

But with his stake rising in value from just over £600,000 to more than £8m recently, he’s unlikely to be having sleepless nights over the fact that he didn’t join his fellow directors in their buying spree.

Chairman Nick Kuenssberg spent £31,000 on four forays into the market – a figure which has turned into £207,360 at current prices. Non-executive director and former McGrigor Donald partner Fred Shedden is sitting on a paper profit of £192,000 on his investments over the year, and operations director Sarah Haran is up by £94,466.

Although Iomart is too small to have appeared on the radar of many institutional investors until recently, the Fleming Mercantile Investment Trust, which holds a 7% stake and is the largest external investor, has also enjoyed the ride.

Fund manager Martin Hudson can’t comment on individual stocks – but couldn’t help admitting he was "delighted" with Iomart’s run. Those who have held Iomart shares since the technology boom now hold a stake in what is a very different company – another factor in its dramatic rise.

Founded five years ago, the company began life as an alternative telecoms and internet service provider. But two years ago it sold its ‘madasafish’ ISP business for £3m and early last year also sold its loss-making broadband business, which had its support base in Stornaway, to Centrica. Now it is focused on providing e-mail and messaging software and services to small businesses and on web services.

Both arms of the business have won significant new contracts this year and interim figures due out later this month are expected to bring news of further progress. It is perhaps Iomart’s NetIntelligence product, bought two years ago from the receivers of Glasgow-based Actis Technology, which is creating the most interest among investors.

NetIntelligence is effectively a security service for computer networks – blocking viruses, spam and unsavoury material from entering computer systems via e-mail, but also enabling bosses to keep a watch on how employees are using the internet and what for. It is also able to scan networks for unlicensed software and copyright material such as music, which could land companies with hefty fines.

Iomart admitted initially that sales of NetIntelligence had been slower than expected, but the picture appears to have changed this year as the internet security industry enjoys dramatic growth against a backdrop of almost daily reports of spam and virus problems. In July it announced deals to sell NetIntelligence to Highland Council and Fife College, together worth more than £150,000.

Iomart has also benefited on the back of bullish trading figures from Surfcontrol, the much larger quoted group which specialises in e-mail filtering and internet control products. It has also increased in value several-fold so far this year.

Ron Condon, editor-in-chief of the industry’s Secure Computing magazine, says internet security is currently the hottest IT sector to be in.

"It’s the one bright spot on an otherwise pretty dark horizon," he says. "In the US spending on security has now gone above 5% of total IT spend, which is a significant figure."

As well as the onslaught of spam and viruses hitting systems, Condon believes increased corporate liability in the wake of scandals such as Enron and WorldCom was driving much of the growth in the market.

"Changes in legislation mean the buck stops higher up the management chain than ever before," he says. "If a company’s data systems are compromised then the chief executive could ultimately be held liable. There’s nothing like personal liability to get senior management to take action, and that means spending in the security sector will continue to rise." Although there are a number of other similar products to Iomart’s on the market, Secure Computing recently gave it a ‘full marks’ rating in a product test.

Dominic Dudley, of New Media Age magazine, believes the growth of the market as a whole is guaranteed in the near term. "There’s a huge amount of interest in the internet security market at the moment," he says.

"The investment community see it as a good area to be in and that is driving share prices of companies like Iomart. Every time there’s a story about hacking or breaches of security it adds more interest to the sector and it is a market which can only grow."

Of course, even with the rise over the past year, Iomart’s share price is still well down on the heady heights of 2000 when it hit more than 90p.

But valuations during the technology bubble have since proved to be almost meaningless in many cases, and Iomart’s post-burst performance is distinctly impressive compared with all its technology peers.

With the staggering rise seen in the past year, investors might be forgiven for thinking they have missed the boat with Iomart. But one fund manager who has been a long-standing investor in the company has no plans to take profits despite the rise.

"We’re very happy with how things are progressing at Iomart and we see no reason to sell," he says. "The levels it fell to last year and again earlier this year didn’t make sense, and what we’ve seen since then is the market starting to judge it on its merits."

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