Share tip of the week: software firm will ride out the recession

A novice investor recently asked what I look for when stock-picking. I focus on firms with defensive positions in growing markets, providing quality products, ideally saving customers time and money a key to success in a recession. A firm must also have a sound balance sheet, good earnings visibility and be significantly undervalued. Kewill fits the bill.

Kewill develops proprietary software that simplifies the ordering, shipping and transporting of goods across international borders. Its applications make it easier to handle the mountain of export documentation required by global trade laws. It also greatly improves the logistical processes between the supplier, retailer and consumer, hence minimising working capital levels.

The software is so popular that it has been bought by 23 out of 25 of the world's largest freight forwarders. It's now the number-two player with a 9.8% share, behind SAP at 14.6%. Blue-chip clients include heavyweights such as DHL, FedEx and Marks & Spencer.

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Kewill is also a pioneer in the delivery of 'software as a service', benefiting from mushrooming growth in cloud computing. Rather than forking out for a one-off licence, subscribers only pay for their usage. The programs are hosted, upgraded and delivered by Kewill online. This stimulates faster take-up and generates recurring incomes, which now represent 59% of turnover.

Kewill Systems ( LSE: KWL ), rated BUY by The Independent

Figures for the year ending March met analysts' forecasts, despite the global destocking in the second half, which severely hurt its customers. Revenues were up 5% to £53.3m, generating an operating profit (Ebitda) margin of 14%, and closing with net cash of £4m. New contracts included seven-figure deals with Maersk of Denmark and Japan's Yusen, two of the world's top transport groups.

The City expects 2009/2010 sales and underlying Ebitda of £54.6m and £8m respectively, putting the shares on an attractive EV/Ebita multiple of seven. Better still, the firm has already bagged around 85% of its 2009/2010 turnover, covered by a combination of recurring, repeat and backlog orders.

Kewill is a small fish in a big pond, so there are risks it may get squeezed by its better-funded rivals. A severe recession would undoubtedly hit earnings, and the company is also exposed to foreign currency fluctuations, as most of its business is overseas. But the shares are not expensive for such a high-tech firm, and there's even an outside chance of a takeover from a rival. House broker Investec has a 90p price target.

Recommendation: BUY at 75p

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments