The Investment Column: German losses pile pressure on LogicaCMG

Arena Leisure; Devro
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The Independent Online

They say that a rising tide lifts all boats. And so LogicaCMG unveiled a 66 per cent rise in annual profits yesterday, thanks to the continued recovery in the IT services market last year.

The group, which provides IT services to business customers, registered its best performance from core operations in the UK and the Netherlands. Here, profit margins hit 13 and 12 per cent respectively, however, other parts of the company did not perform so well.

Germany and central Europe disappointed with losses. In Germany. the company is struggling because of a mixture of tough market conditions and a lack of scale. Although last year's acquisition of Unilog doubled the size of its operations it is unlikely to make the unit profitable any time soon.

In fact, LogicaCMG suffers from a similar problem in France. Here it is hoped that Unilog will give it the scale to compete with global players such as IBM, Capgemini and Atos. France is much more important to the group than Germany - it accounts for nearly one-quarter of the group - so it is vital that the combination with Unilog proves to be a success.

During the boom, LogicaCMG was able to cash in on its telecoms products division, which provided software to mobile phone companies.

In the subsequent downturn, profits here were wiped out, and although LogicaCMG managed to restore this business to the black last year, its margins remain some way below the average for the group (they are less than half of those enjoyed by the IT services ops in the UK and Holland).

Looking ahead, LogicaCMG does have a great opportunity to outperform. Over the past year it has rapidly grown its ability to provide services from low-cost offshore centres such as its facility in Bangalore.

In this respect, the group is some way ahead of its European rivals, such as Capgemini and Atos, which should help it beat the competition when it comes to cashing in on the growing trend among corporates to outsource their IT needs.

At 18 times forward earnings its stock is not expensive, however, the risk associated with the integration of Unilog and the losses in Germany make it just a hold for now.

Arena Leisure

Having spent many years disappointing the City, Arena Leisure has finally started to deliver for shareholders. Annual results from the racecourse owner revealed yesterday a 30 per cent jump in operating profits to £6.7m and a 10 per cent rise in sales.

Arena has been boosted by record fixtures and attendance at its six courses which include Lingfield Park, Wolverhampton and Royal Windsor. The group organises more than one-quarter of the UK's horseraces and is doing particularly well from a drive to attract corporate customers, who tend to spend more money than your average punter. Last year Arena saw 47,600 of them visit its courses, up 17 per cent on the previous year.

In the past, the company's digital TV channel, attheraces (ATR), has been a major headache for management. But even this aspect of the business is enjoying a turnaround. The channel is experiencing record audience levels - about 1.2 million individuals tune in every month - and it generates more than £2m (and growing) of interactive red-button betting turnover on a weekly basis. Given the aggressive costs cuts ATR has experienced over the past 12 months it should have little trouble breaking even this year.

Arena Leisure is an asset-rich company with plenty of opportunities to grow profits further by acquiring additional fixtures and investing in its existing courses. Its management assured investors yesterday that the group enjoyed a strong start to 2006 and there is little reason why this will not continue in the months ahead.

This is not a stock that is going to double overnight but for long-term investors it should prove to be a good bet.


Full-year profits from the food-casings maker Devro came in slightly below expectations yesterday. To blame was the fact the company had one fewer trading week in December. Nevertheless, pre-tax profits rose to £25m from £18m previously.

During the course of the year Devro, which focuses on making sausage skins from collagen, also suffered a disruption in ordering patterns from customers in the US, which mainly impacted the third quarter. Volumes across the Atlantic are beginning to bounce back.

Looking to the future, the group hopes to see further growth from emerging markets - namely Eastern Europe, Latin America and South-east Asia - and said it is working on a number of new products to support this.

Devro has said it does not expect to see any negative impact on its business from avian flu - it was hit hard by the BSE crisis of a few years ago - and some in the City believe it might actually benefit should demand for sausages rise as people abandon poultry.

On the downside, the company is up against rising energy costs - it hopes to offset these by reducing expenses elsewhere - and is also exposed to currency fluctuations because of the international spread of its operations. At 135p, its shares trade at 14 times forecast earnings and are fairly priced.