Investment: Guardian gains from corporate IT disasters

IT'S NO secret that computer systems are becoming increasingly vital for most companies to operate properly. But until recently few had put much thought into what happens if their expensive mainframe or server suddenly breaks down or is ruined by a fire or flood.

However, companies are increasingly preparing for the worst. Disaster recovery groups such as Guardian IT, which yesterday reported a 30 per cent rise in operating profits to pounds 7.3m for last year, are being called in to back up vital computer information and, in some cases, provide office space that will allow staff to carry on working.

And the market is booming. According to Peter MacLean, the chief executive, pressure from regulators such as the Bank of England and the Financial Services Authority is forcing financial institutions to provide proper backup. "In some areas disaster recovery is no longer optional. It's a mandatory requirement," he says.

Guardian's customer base is largely based in the City. One of the company's sites just north of the Square Mile is now full, and it is spending pounds 7m this year on a new 100,000 sq ft centre in London's Docklands, which could offer work space and dealing desks to 1,600 City workers.

Meanwhile, Guardian is hoping that pressure from regulators will make disaster recovery mandatory in other industries such as telecommunications, the utilities sector, and the health service. Analysts think the market for recovery services will grow by up to 19 per cent a year.

Guardian is one of the largest players in the market with a share of about 14 per cent. And the income stream is extremely predictable. Guardian yesterday pointed out that it has an order book worth pounds 67m, of which 45 per cent will be booked this year. This means that although there are still 10 months of the year to go Guardian is already guaranteed to match last year's turnover of pounds 30m in 1999.

However, there are several worries. The first is Guardian's operating margins, which reached 24 per cent last year. They will be squeezed this year due to the new investments. Analysts suggest that, as the market matures and contracts are renewed, Guardian may find its margins are unsustainable.

This is worrying given Guardian's high rating. Since its flotation last year shares in the company have more than doubled in value, closing at 572.5p, down 2.5p yesterday. On 1999 profit forecasts of about pounds 8.6m, the shares now trade on a multiple of 54 times earnings.

"If you want to be on a forward PE ratio of more than 50 you have got to be growing your bottom line at a terrific rate," said one analyst. "I just can't see Guardian keeping it up."

Yesterday directors and senior management announced that they planned to cash in shares in Guardian worth more than pounds 12m, while the group's venture capital backers are raising around pounds 30m by selling down their stakes. It all points to a problem that dogs British IT investors - for most of the good companies, the growth potential is already reflected in the share price.