The Week In Review: Logica looks ready for a comeback


j.daley@independent.co.uk

Logica CMG's shares slipped 5 per cent on the back of the IT services company's slightly disappointing 2006 results this week. The sting came after organic growth of 5 per cent failed to impress.

Yet the company's tone was broadly positive after it improved margins and matched profit expectations for the year, and many analysts were quick to label the share-price decline an over-reaction.

The biggest issue over recent months has been the cost of hiring expensive contractors due to a lack of available staff. While this trend was disappointing, it points to robust demand in Europe.

Logica has teetered on the brink of regaining its FTSE 100 status over recent years after bulking up with acquisitions in Portugal, France and Sweden.

Analysts remain confident the company can improve margins further and achieve better results in France and Germany, where it has struggled. It also has non-core assets that could be sold to create value. Logica trades at a discount to the IT services sector on a multiple of less than 15 times 2007 forecasts. Buy.

CHEMRING

The "war on terror" has been good for the defence manufacturer Chemring. It is the world leader in providing decoy flares that fool missiles into going after the wrong target. The company's results, published this week, speak for themselves: revenues were up 55 per cent, pre-tax profits gained 66 per cent, while the dividend was boosted 52 per cent. The other half of the group, the "energetics" division, is being boosted by a strong acquisitions programme. Buy.

LIONTRUST

The boutique fund manager Liontrust feels it has been hard done by over recent years. While its managers insist their investment philosophies will deliver results over the longer term, its fund inflows, and consequently its share price, have constantly been reacting to the business's short-term fortunes. Valued at less than 15 times this year's forecast earnings, the stock is trading at a discount to many of its peers. Buy.

ASTRAZENECA

AstraZeneca was hitting the headlines for all the wrong reasons towards the end of last year, with bad news on two important drugs. The City is impatient for a breakthrough and the latest hopes are pinned on Astra's new experimental heart drug, AGI-1067. New investors would do well to wait for some more clarity before getting involved. Existing investors, hold on.

MCINERNEY HOLDINGS

Ireland's biggest housebuilder, McInerney Holdings, presented the market with another bullish trading update this week, unveiling an 18 per cent increase in completions for the year, and boasting that prospects remained strong for the year ahead. But while 2006 will now be another record-breaking year, the first effects of a series of interest-rate rises are now beginning to show. Take profits.

ZETAR

Chief executive Ian Blackburn, who made his name building up chilled foods group Perkins, launched Zetar as a cash shell two years ago. Since then, he has made four acquisitions, the biggest of which is Kinnerton, a producer of chocolates and other confectionery, which are branded under the names of whichever toy or movie is the talk of the playground. At just 14 times forecast earnings, the stock does not look expensive. Buy.

JD WETHERSPOON

JD Wetherspoon toasted another sparkling set of sales figures this week. Shares in the pub operator jumped 5.5 per cent after it revealed like-for-like sales increased by the same amount over the Christmas period. The company is preparing for the fallout from the smoking ban that will extend into Wales and England in April and July respectively, but early signs seem promising. Still, after a 90 per cent rise in its shares over the past year, it is now trading at a considerable premium to its peers. Now is the time to take profits.

SCI ENTERTAINMENT

The video games maker SCi Entertainment had a good first half, with continued strong sales of Lego Star Wars helping to boost sales 40 per cent. More impressive was that half of its sales were derived from new releases such as a game based on the film Reservoir Dogs. Warner Brothers has already snapped up a 10 per cent stake in the group. Buy.

AUTONOMY

Autonomy had a stellar year in 2006. The internet software company's fourth-quarter results beat market expectations after it signed seven deals worth more than $1m in the period. Revenue for the year exceeded $250m compared with $90m in 2005 whilst pre-tax profit more than tripled to $69m. The shares trade on a hefty valuation of 31 times 2007 forecasts. But with the group building up a head of steam as it enters 2007, there should be more value ahead. Buy.

PREMIER OIL

Premier Oil has this week announced two deals, worth $96m, and an update on production and exploration news, all positive. Late last year the company was in bid talks - reportedly with Dubai Energy - but these discussions were unsuccessful. Still, whether or not the company is bought, its exciting exploration offers upside for the shares. Buy.

SMC

Investors in the architect group SMC watched the shares nose-dive more than 30 per cent this week when the company said it would adopt a more conservative way of accounting for its work in progress. As a result, profits for 2006 are set to come in almost £2m below the £7m forecast by its house broker Numis. The episode has knocked the management's credibility, but SMC - whose stars include the well- respected Will Alsop - still has an excellent franchise. Plus it now trades on a very modest valuation of less than 10 times' forecast earnings. Buy.

The above recommendations are taken from the daily Investment Column.

Right climate for Johnson Matthey

Johnson Matthey, the world's largest manufacturer of catalytic converters, has enjoyed a prosperous few years, as climate change and the environment have climbed their way up the political agenda. All new vehicles in the US and UK are now fitted with emission-reducing converters, while Johnson is also cashing in selling similar appliances to heavy industry.

The catalysts division now accounts for almost two-thirds of group sales, and this will be even higher once the company has completed the sale of its ceramics division within the next few weeks. But Johnson is no one-trick pony. The group also has a solid pharmaceuticals division, which enjoyed a return to growth last year after a poor 2005 and, with several new and exciting contracts under its belt, looks well poised to continue improving into 2007.

The company's fourth leg, its precious metals division, proved to be the star of 2006, with profits up more than 20 per cent over the six months to the end of September, boosted by rising metal prices. Buy.

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