The sausage stops sizzling

Sausage epitomised all that was wrong with the technology boom. Maverick management, ambitious acquisition programs and failed mergers.

But there is also little doubt that SMS is now a quite different company from what Sausage was in April last year. Is a change in the air?

Slowly, we think it might be. SMS has the makings of a quality technology company, although the mess is taking time to clear up.

When Sausage bought privately owned SMS Consulting from Lloyd Roberts just after the technology boom imploded last year, it acquired a real IT consulting business with operations in Australia, Asia and Europe. Given that SMS Consulting generates 70% of total revenues, it made sense that Sausage should change its name.

Real business

So SMS has one of the characteristics of a quality tech stock – a real business. That business is expected to generate revenues of around $150m for 2001. Unfortunately, the company still lacks profits and positive cashflow, even before abnormals, but we think that is largely a function of market conditions.

Technology consulting and e-commerce are here to stay, as we said in our review of SecureNet last issue. This downturn is but a temporary blip that will shake out the weakest players.

While SMS fails the immediate 'profits and cashflow' test we think that the company can make a profit from $150m in revenues. 2001 will produce another loss and more large writedowns are virtually certain. It's too early to say whether 2002 will produce a bottom-line profit, but we think it more likely than not.

Management is also taking steps to re-focus. Given that CEO Lloyd Roberts used to run SMS Consulting before Sausage bought it, he has no allegiance to the former loss-making businesses. He has claimed rationalisation is complete, although don't be surprised if a few more unprofitable divisions are jettisoned. New Chairman Laurie Cox should bring increased management depth and new perspectives as well.

Financials

What about the financials? Well, they're getting better. While SMS has no debt to speak of, the half-yearly writedowns of $188m were not kind to the balance sheet. The company has just raised $17.3 m, which gives it sufficient working capital and allows it to take advantage of other 'opportunities'.

SMS shares have risen 20% since last issue (Hold for the Upside - $0.54) as investors become more comfortable with the idea that the worst has passed. Management is clearly of the same opinion – they have just issued themselves with 17m options at a strike price of 48 cents.

From some technical analysts' perspective, the chart suggests a textbook buy. That's not quite enough for us to jump in with both feet, but aggressive investors should consider SMS a SPECULATIVE BUY.

Others might want to HOLD FOR THE UPSIDE pending a likely 'clearing of the decks' in the full-year result. Whatever the case, SMS chequered history appears to be fading fast.