Xpertise Acquires Parity Group - This Is One To Watch

Patience is a virtue in business that is not readily appreciated in the City. But one man who has been patient and now looks set to reap the rewards is Ian Johnson.

He has been Finance Director and latterly Managing Director of the training group Xpertise since being a member of the management team that bought it out of Logitek in 1994. The shares have been traded on AIM since 1999 but having slumped in the technology fall-out that took place over the next couple of years they have never really recovered.

This owes something to the fact that Xpertise ran up losses in 2003/5 but also to a perception that it operates in a highly competitive industry that is vulnerable to any downturn in the economic cycle.

The next year will provide an interesting test of these views, especially as Xpertise has finally made the big strategic move for which Johnson has been waiting. This is the £4.775m acquisition of the training division of Parity Group in a deal that will vault Xpertise into the number two position in the UK IT training business.

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But the really eye-catching figure for Xpertise shareholders is the £1.75m of cost savings that it expects to achieve from combining the two businesses. Add these to the £940,000 pre-tax profit forecast by broker Daniel Stewart and the £200,000 of operating profit made by Parity Training in 2007 (after adding back the non-continuing return on pension plan assets) and even after the deduction of interest on the £2.25m debt taken on to finance the deal, Xpertise’s annual pre-tax profit would be running at the rate of about £2.7m.

Even in today’s depressed market for small company valuations that would make the enlarged market capitalisation of Xpertise of around £7m look very low indeed.

So the question now is whether Xpertise can achieve these sorts of numbers and how the business will stand up in today’s economic climate. Dealing with the latter first the conclusion to which one is inclined to jump is that the corporate training budget would be one of the first things to be cut in a recession, added to which staff lay-offs and a freeze on new recruitment would lessen the number of employees for whom training might be necessary.

Trading upbeat

In fact though, Xpertise has announced that trading in the first half of 2008 has been good and that its major customers ‘have continued to contribute strongly to this growth in revenues.’ Underlying this is the continued strength of the IT training market. While Xpertise offers courses in so-called ‘soft skills’ — things like personal development, customer service training and team development — the core of the business is instruction in the use of information technology.

Xpertise offers over five hundred IT training courses while Parity Training offers over two hundred and fifty. These are targeted at senior IT professionals through to end-users and are conducted at classrooms up and down the country either by full-time staff or by associate instructors brought in as and when required.

Although the use of the latter gives the business some flexibility the key to its profitability is basically to get bums on seats - clearly the cost of teaching a class of ten people is pretty much the same as teaching one of fifteen or twenty. So the business will be tested this year, but the UK market for IT training grew by over 10% last year and with the efficient use of IT being a business imperative rather than a luxury underlying demand should be quite robust.

The new group will have revenues of about £40m, putting in a clear second place behind industry leader QA-IQ which turned over £63m in 2007, and significant customers include HBOS, Computacenter, BT, Barclays and Microsoft as well as those from the public sector.

The strategy now is to use the enhanced profile of the enlarged group to win additional major customers and managed training service contracts. Xpertise also intends to optimise utilisation of the national network of sixty-five classrooms, cross-sell the group’s full range of courses across the enlarged customer base, and use proprietary courseware wherever possible. But Xpertise is also looking to capture those £1.75m of cost savings.

It reckons that it will make £1.25m of cost savings as a direct result of a cessation of a number of recharges of Parity Group central overheads to Parity Training, while it has identified a further £0.5m from the duplication of overhead costs.

Xpertise is paying £4.775m for Parity Training in cash, so if one simply adds back these cost savings to Parity Training’s 2007 pre-tax profit of £184,000 the business is being acquired on a PE ratio of about two and a half. Even in the current climate this looks like a pretty good deal — one that should prove to have been worth the wait. This is definitely one to watch.

Regards,

Tom Bulford
for The Penny Sleuth

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