Belfast Telegraph

Analysts in war of words over finances at First Derivatives

Margaret Canning

By Margaret Canning

Newry financial and software consultancy firm First Derivatives plc (FD) has come under fire in a hedge fund's research over its growth pattern and operating style.

In research earlier this month, Shadowfall Capital and Research criticised several aspects of FD, which employs around 2,400 people worldwide, including around 900 in Newry.

FD is listed on the Alternative Investment Market (AIM) and one of just three plcs here.

Its turnover was £186m in the year to February 28 - up 23% on the same period a year earlier.

Shadowfall is known as a short-seller - short-sellers operate by borrowing shares to sell them on in the belief that the price of the shares will fall again, enabling them to be bought back at a lower price to make a profit.

FD's shares were down 15% after the concerns expressed by Shadowfall this month - including a claim that it was more of a consulting firm than a software company.

Yesterday, the share price was up 9% to 3,180p. Shadowfall's Matt Earl told a Daily Telegraph column that the shares "are worth no more than £20 and possible as little as £10".

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Shadowfall had also claimed that profits had been boosted by "one-off factors" which had little to do with day-to-day operations. It said: "FD describes itself as a software company, however, in our view, FD demonstrates the characteristics of a low-margin consultancy business.

"Our research leads us to believe that its historical profits have been significantly bolstered either by one-off factors that have little to do with the day-to-day operations of the business, or by capitalisation accounting treatment that has shielded costs from its profit and loss."

And it also queried First Derivatives' spend on research and development.

The Newry company, which has adapted its Kx technology to new applications beyond its original market of financial institutions, refused to comment.

But in a note responding to Shadowfall, analyst Liberum said: "While some accounting policies could be more transparent, we believe many of the claims that arose over the past hours are unfounded and speculative.

"In our view, First Derivatives' strategy of disciplined growth provides a path for consolidating the Kx technology as a global leader in big data applications and our investment case remains unaffected by such claims."

Liberum also queried Shadowfall's suggestion that its software function was overplayed: "In our view, this reflects an exaggerated expectation of First Derivatives turning into a pure-play software business and dismisses its long history as a consulting company.

"Despite software lying at the core of the company's long-term growth strategy, it only became a majority part of the business in financial year 2016."

Shadowfall had also questioned some of the firms which FD has invested in, calling some of them "highly speculative start-ups". Liberum said the Kx Technoloy Fund supported tech start-ups but that announcements did not suggest any equity investments have been made.

Economist John Simpson said: "Speculative comments on the strengths or weaknesses of a business such as First Derivatives are unwelcome to the owners and shareholders in the company.

"As a listed company, First Derivatives is subject to the usual testing report requirements. The published results have been consistent with those of an ambitious enterprise given a strong lead by the management. First Derivatives will be expected to offer a considered response to reassure share holders."

Belfast Telegraph