HSBC may struggle to raise much Christmas cheer at its Canary Wharf headquarters. A long shadow has been cast over this year’s party season by the banking giant’s announcement last month of plans to axe up to 10,000 jobs.
FDM Group, an IT services business valued at £825m on AIM, London’s junior market, has also suffered in the fallout. The company, set up in 1991 by Rod Flavell and his wife, Sheila, who still run the business, trains graduates and former servicemen and women to become IT experts and then contracts them out to blue-chip companies. It re-listed five years ago after a management buyout backed by private equity in 2009.
FDM’s staff — nicknamed “mounties” after it bought Mountfield Software in 1995 — specialise in software testing, development and helpdesk services. HSBC is one of its biggest customers.
The bank’s cost-cutting drive sparked concerns that FDM’s contract could be hit. That, coupled with fears that a Brexit blow to the economy could choke off demand from customers such as the government, has rattled investors.
The shares are down 26% to 756p since May, although they have recovered a little from their fall to 647p in October when the HSBC announcement was made. That sell-off seems harsh. The HSBC cuts are not expected to affect the FDM contract.
However, the Brexit fog has had an impact. Rod Flavell, chief executive, admitted at July’s half-year update that the company had seen “lower activity” with the government. It was not enough to significantly dent the numbers, though: half-year sales to June rose 14% to £134m, and pre-tax profits climbed 9% to £25m. If Brexit leads to a downturn, the hit could be more severe. That said, FDM has weathered economic storms before.
While rival IT services firms suffered when the financial services sector reined in costs during the banking crisis 11 years ago, FDM proved resilient. It recorded sales growth of 4.8% and 1.3% respectively in 2008 and 2009 — and remained profitable. Part of that is down to FDM’s price advantage: it charges a third less than the market rates.
Analyst Peter McNally at Panmure Gordon backs FDM to remain strong, with sales up 10% to £270m and profits up 6% to £54m for the year. Of the £40.5m in expected net operating cash flow, he thinks £35.3m will be paid in dividends. McNally has set a target of £11.40 — 51% above the current share price.
As digital transformation and the AI revolution sweep through the workplace, the need for IT services will strengthen. FDM should be a winning bet. Buy.
