I recently wrote a piece on Fidessa saying that I was not happy the company has been approached for a takeover. In the piece I mentioned that Fidessas earnings are currently suppressed meaning that the takeover bid was too low for my liking. Furthermore, I mentioned that Elliot was building a stake meaning the activist investor would certainly push the Fidessa board to negotiate a higher takeover price.
This finally seems to have played out as Fidessa received two new bids with the higher one worth £37.50. This lead to the share price jumping to £41 – above the highest takeover approach price – due to speculation of a biding war. With the share price now pricing in a best case scenario in my view, I sold my Fidessa stock for £40.85 a piece and pocketing myself a 100% gain during my six month of holding the stock! Not bad if I may say so myself.
But even with a 100% gain showing in my account, I am not happy Fidessa is leaving my portfolio as companies with its characteristics and quality metrics are hard to find. Fidessa was a unique company as it provided the following traits:
- Market-leading competitive position with good long-term growth potential : Fidessa is a market leader in the multi-asset trading and investment infrastructure markets. Their unique position makes them highly sticky as firms using their product find it hard to move to a competitor. This provided Fidessa with pricing power.
- Strong balance sheet: Fidessa is a unique company in the UK markets in the sense that it has no debt on its balance sheet. The importance of this should not be underestimated as it having a clean balance sheet helps insulate a company from the rising cost of debt. A strong balance sheet can also provide protection if rising interest rates ultimately tip the economy into recession.
- Asset-light business model: An asset-light business model is a model whereby the company has relatively few capital assets compared to its operations. Being asset light enables a business to scale more quickly and have higher operating cash flows turning into free cash flow as there is less of a need for expensive capital expenditures.
- High free cash flow generation: The company has consistently high conversion of operating profit into operating cash flow which is a sign of a high quality business. Generating copious amounts of free cash flow enabled Fidessa to pay healthy, progressive dividend streams to investors over the years.
As you can see from the above, Fidessa is truly a unique business. There are not many companies like it in the FTSE350. Though I am sad to see it go from my portfolio – as I’m sure it would have had double digit compounded returns – I need to do so. With the money I have received from Fidessa, I have been buying shares in Sage and Relx.
Though Sage and Relx are not as high a quietly a business as Fidessa, they both possess the characteristics mentioned above. Furthermore, both companies shares have come down in price recently with the FTSE downturn and are decently prices with Relx sporting a Free Cash Flow Yield of 5.8% (dividend yield 2.9%) and Sage offering a Free Cash Flow Yield of 5.5% (dividend yield 2.6%).
Both these companies are interesting and will greatly enhance my portfolio. Looking at RelX first, the company has tilted from an offline print publisher to an online information and analytics company. This digital business model tends to embed Relx’s products deeply into customer’s workflows, helping to provide steady, recurring cash flows. The company has been on a reinvestment drive of late and the results of this are being seen with organic sales growth during 2017 being 4%, earnings grew +7% and the dividend increased by 10%!
Sage is a market leader in the provision of enterprise software to small and medium sized businesses. This market is sticky, structurally attractive and is growing at approximately +7% per annum. Sage has been through an investment phase over recent years, both centralising its business under one core technology platform, and accelerating its investment in new technologies to ensure this competitive position is retained. The stickiness of Sages products can be seen by the high recurring revenues figure of 78%. The company expects this number to grow to 90% as it pushes more customers to the cloud. The company produces shed loads of free cash flow ensuring the dividend in well covered. The most recent dividend has been increased by 9%.