Speculating on Solution 6
Recommendation
That's a bad start. But what's in store for this former tech darling?
Unfortunately, we're not experts in this field. It's tough trying to assess the company's competitive advantages and their durability so it certainly isn't one for conservative investors. But what about those with a more speculative bent?
Our view is that if you're ever going to buy a tech stock then now is probably a good time. But which tech stock should you buy, and why?
Smart money
In these situations, it often pays to follow the smart money. And it's been pouring into Solution 6 lately. Back in issue 99/Mar 02 (Hold for the Upside - $0.76), we highlighted that Kerry Packer's CPH Investment Corp and bargain hunter Sir Ron Brierley's Guinness Peat Group (GPG) had both acquired 7% of the company.
Recently, GPG increased its stake to over 11%, taking advantage of lower prices. And GPG man Michael Jefferies has been appointed to the Solution 6 board, an interesting sign.
We have a lot of respect for Brierley's ability to sniff out undervalued and unloved companies and right now you can buy shares in Solution 6 at prices below what he paid.
So what is it that he sees in this company?
Solution 6's core business is known as Professional Software Automation. In layman's terms it designs software that makes life easier for professionals, including the top legal and accounting firms around the world. Sales are quite evenly split with 36% coming from Europe, 33% Asia Pacific (including Australia) and 31% North America.
Competitive position
As far as we can tell, its software has a strong competitive position, especially in accounting. All that clients of big accounting firms need to do is hand over their information.
The accountants then use Solution 6 software to help prepare the accounts, produce statutory reports and lodge tax returns.
Late last year the company sold its other major division, IT Services, to Alphawest. Around $15m is still owing from the deal and should be paid this year.
The IT Services division had been a major distraction, especially during the hype of the tech boom, so its disposal should now enable the company to focus on its major business.
So Solution 6 appears to have a sound future, although it is not currently profitable. In the last full year, the company lost 36 cents per share. And with another loss in the first half to 31 December 2002, the current full year is unlikely to show a profit.
No dividends
Indeed, Solution 6 hasn't paid a dividend since 1995 and with significant tax losses on the balance sheet, it's unlikely to pay fully-franked dividends for some time yet, even if the profits do start rolling in.
But those factors partly explain why Solution 6 is so cheap at the moment. The stock is down 25% since issue 110/Aug 02 (Hold while Unstable - $0.57) and our higher than average risk ratings should be noted.
This isn't a stock for the bottom drawer but those investors comfortable with riskier situations might think of following Ron Brierley's lead. SPECULATIVE BUY.