Retail Decisions (RTD)

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These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

Initial Recommendation: RHPS Issue 68 / July 2004

This world-leading credit card checking company is ready for lift off in a rapidly growing market. Buy now to cash in

Next time you are taking money out of a cash point, look out for the shifty character sitting 20 yards away. He is watching your fingers - and he knows which numbers you have just hit. This is called “shoulder surfing”. And it is just one of the methods used by fraudsters. Another is to intercept your mail and grab your card and PIN number. If you haven't got a shredder, then get one. If you chuck your old bank statements in the dustbin, don't be surprised if they are stolen in the middle of the night.

Identity fraud is growing fast. And no sooner is one avenue closed to the fraudsters than they find another. Take mobile phone operators: many of them used to have a huge problem with fraud because they couldn't verify credit card details. You could top up your phone minutes by typing any credit card number into the handset - but the operators had no way of verifying that it was your credit card. So down in the Dog And Duck the same stolen credit card was passed round and everyone topped up their minutes! Retail Decisions first tackled this problem with O2, and following dramatic success, T-Mobile and Virgin Mobile signed up to the service.

RHPS Verdict: Retail Decisions derives revenue each time it checks credit card details. As rising volumes fall upon a fixed-cost base, profits will grow rapidly. Institutional investors are notably absent from the list of shareholders, but Retail Decisions is starting to broadcast its message to the City and the shares are ready for lift-off.

Cutting the cost of fraud with leading-edge technology

I have always thought that credit card details are checked by the banks. Not so. Below a specified “floor limit”, of say £75 - known to the fraudsters - the credit card details are checked by a third party. Retail Decisions is one of the largest checkers in the world. It can spot a suspicious transaction. Suppose you buy something with your credit card in Edinburgh at 11.00am and then the same card is presented in Madrid 10 minutes later - hmmmm, strange! Of course it is a lot more complicated than that. Retail Decisions monitors the number of transactions on any card, what is bought, where it is used and up to 40 other variables. And of course it has a list of stolen or lost cards. It maps the results and if it spots a transaction outside the usual pattern you will get that call - “Can you confirm your mother's maiden name?” It uses leading-edge technology, including the neural network software developed by Nobel Prize-winning Professor Leon Cooper.

Retail Decisions is the global leader in this business. It has four main rivals, all based in the US. They are VeriSign, CyberSource, ClearCommerce and Authorize.net. But according to a study by independent consultant Financial Insights, Retail Decisions is the strongest in terms of the two key competitive features: the ability to spot fraud and the ability to arrange cross-border payments.

Big-name clients, growing reputation

So it is no surprise to find that Retail Decisions' client list is growing fast. It includes Tesco, Lloyds TSB, Shell, Wal-Mart, and the Royal Bank of Canada. Banks are desperate to cut the cost of fraud and Retail Decisions can help companies reduce transaction fraud by as much as 40%.

Where you can present your card the banks bear the risk of fraud. But in a “card not present” transaction - for example an online or telephone transaction, the retailer takes the risk. Online retailers are losing sales because they do not trust the payment. They typically reject 3%-4% of orders, because they have suspicions about the credit card, and 23% of orders are reviewed manually, adding a significant cost. Chief executive Carl Clump told me that to reduce their risk, many retailers are putting blanket bans on all transactions of a type that they consider risky. For example, many US companies won't accept any international transactions. Retail Decisions can help them to be more discriminating in what they accept or reject. What is more, merchants are penalised by the banks if they do not keep the level of fraudulent transactions below 1%. The ultimate sanction is to withdraw the right of the merchant to accept a certain credit card. Due to persistent fraud in the mid-1990s, Visa prevented AT&T from accepting its card for credit card calls - a problem that Retail Decisions was instrumental in helping to solve.

Massive profit growth in 2003!

Retail Decisions was demerged from Card Clear in 2000 in order to pursue this business, but first it bought an Australian company called Motorpass. This issues cards that enable drivers of company cars to buy petrol ensuring that they do not cheat, and their employers to manage spending and payment of fuel tax. In 2001 this was merged with a larger, but less efficient, rival, Motorcharge. Thanks to synergy benefits, this division, which accounts for 42% of group turnover, achieved 50% growth of operating profit, to £5.9m, in 2003. This is a strongly cash-generative business that provides the funds to develop the fraud prevention divisions.

The group operates in Europe, the US, South Africa and Australia, but also has a payments consulting division that last year worked in 14 other countries, and provides an insight into future opportunities.

The advent of “chip and pin” will affect the prospects of the “card present” division. Despite this, co-broker Daniel Stewart is forecasting double figure earnings growth over the next two years, and forecasts free cash flow of over £5m per year from 2005. Payment of a dividend is dependent upon a capital reconstruction, but this may be addressed by the new finance director Richard Amos.

UPDATE 1: RHPS Issue 70 / September 2004

RHPS Recommendation: HOLD

RETAIL DECISIONS (RTD): Struck by Sourcey Lawyers.

Retail Decisions has announced a deal with Cardinal Commerce which will enable its customers to access the latter's merchant software platform for authenticating payments through the Verified by Visa, MasterCard, Secure Code and J Secure payment programmes. However this was overshadowed by news of a legal action filed by competitor CyberSource Corporation. This action alleges a patent infringement in relation to one of Retail Decisions' card fraud screening services, ebitGuard. RTD say that this accounts for less than 3% of its turnover and even less than that percentage of profits. I think it is now best to wait until September 10th, the day of the interim results, when things will become clearer. Until then I am taking the precaution of moving this one to hold.

UPDATE 2: RHPS Issue 71 / October 2004

RHPS Recommendation: HOLD

RETAIL DECISIONS (RTD): In the Lap of the Gods (ie Lawyers)

Retail Decisions reported earnings per share of 0.76p for the first half, up from 0.69p last year. Revenue has increased by 9% and it has signed up 40 new customers. Positive cash flow means that Retail Decisions now has net cash of £3.9m. The outlook is clouded by the legal action launched by rival CyberSource, but on a PE of 10, the shares are certainly cheap enough.

UPDATE 3: RHPS Issue 72 / November 2004

RHPS Recommendation: BUY

RETAIL DECISIONS (RTD)

Trading has improved in the last two months, and the full-year profit will be “materially ahead of

expectations”. RTD's technology is subject to a patent infringement action by CyberSource Corporation, but RTD's lawyers have uncovered “prior art” pre-dating the CyberSource patent, and has asked the US Patent and Trademark Office to ascertain whether CyberSource's patent is valid in its current form. There will now be upgrades to earnings forecasts, which currently stand at 1.5p for 2004 and 1.7p for 2005. The shares rallied strongly and I have restored them to a buy.

UPDATE 4: RHPS Issue 73 / December 2004

RHPS Recommendation: BUY

RETAIL DECISIONS (RTD): Decisively Higher

Chief Executive Carl Clump confirmed to me that Retail Decisions is on track for a full-year earnings per share of 1.6p. The balance sheet is strong, with net cash of £3.9m. Comet enjoyed a 50% reduction in fraud within 90 days of using RTD's software, and also cut 40% from its own costs of checking transactions. RTD has a clear lead over its rivals, and has attracted customers and staff away from one, CyberSource. The latter has launched a patent infringement suit in the area of online transactions, but only 3% of RTD's business would be affected. I have edged my Buy Limit up to 22p.

UPDATE 5: RHPS Issue 73 / December 2004

RHPS Recommendation: SELL

RETAIL DECISIONS (RTD):

The shares are on the verge of entering the All Share index, which means that all those headless index-fund managers who would not have bought the shares when they were more lowly valued, and don't know the first thing about RTD anyway will be plunging their unsuspecting customers' cash into the shares.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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