THE INVESTMENT COLUMN: RoyalBlue's bull run leaves it fully valued

ROYALBLUE IS one of the most impressive in the software sector, make no mistake. Over the past decade it has built a complex trading system for sale to investment banks and other institutions which trade financial instruments, allowing them to automate much of the process. In the City of London, its Fidessa platform is widely used, and the company has gained a good toehold on Wall Street, too, thanks to contracts with the global titan Merrill Lynch.

The trouble is that, with grim inevitability, its shares have shot up too far, too fast on hopes that spending on IT is about to make some sort of spectacular recovery. At 551.5p yesterday, the stock is too expensive.

The strength of the company's finances are such that it was able to give back pounds 8m in a 25.3p-a-share special dividend and still commit itself to acquisitions to move the group into derivatives trading and fund manager- friendly products.

While its 2003 results yesterday, which showed a 28 per cent fall in profit, reflected the downturn, they were also peppered with optimistic noises on the upturn to come. Royalblue's sales force is seeing more interest - but it will be the second half of the year before this is recognised in the results. The first half will still be grim, partly because of the time it takes to install software for interested customers, partly because consultancy revenues (a disregarded bit of the old business model) are still slipping away.

The shares were toppy when we said avoid six months ago; now on 28 times 2004 earnings, the stock is looking significantly overvalued.

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