The Investment Column: Logica's share price fall is over-reaction to mixed results

Chemring; Liontrust Asset Management
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The Independent Online

Our view: Buy

Share price: 173.5p (-9.25p)

LogicaCMG's shares slipped 5 per cent on the back of the IT services company's slightly disappointing 2006 results yesterday. 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.

Logica's results are typically a curate's egg, and 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 in the short-term, it points to robust demand in the European IT services industry.

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. The UK company has built a sizeable European footprint since it merged with Dutch rival CMG in 2002, and has ambitions to become a top 10 global player in the IT services market.

The company has ruled out making any big-ticket acquisitions in 2007 as it knuckles down and consolidates its recent deals. Although competition for deals is heating up as Indian IT services players vie for more business, demand looks solid. Analysts remain confident that Logica 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. With less acquisition risk this year as the company consolidates its assets, the stock looks undervalued. Buy.

Chemring

Our view: Buy

Share price: 1,710p (+60p)

The "war of terror" has been very good for the defence industry manufacturer Chemring. Insurgents in Iraq and Afghanistan have shown a fondness for using shoulder-launched missiles against the planes and helicopters of the US and its allies. Chemring is the world leader in providing decoy flares that fool such missiles into going after the wrong target.

The company has 55 per cent of the market in such "counter-measures", and this division grew organically by some 30 per cent during the 2006 financial year. Growth would have been even higher were it not for the company's own production limits.

The company's results, published yesterday, 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, provides components for the much larger explosive-related market, for use in products such as ejector seats. Here, good growth is being boosted by a strong acquisitions programme, generating turnover growth of 129 per cent last year.

The US is having to increase its deployment in Iraq, and Afghanistan is proving to be intractable. Beyond these two conflicts, there is also demand coming from new aircraft designs and expanded UN peace-keeping operations.

The energetics division provides longer-term growth prospects. The company sees this business matching the size of counter-measures soon. To those with ethical concerns about this industry, it is worth pointing out that Chemring no longer makes any offensive weapons. Buy.

Liontrust Asset Management

Our view: Buy

Share price: 379p (+8.5p)

The boutique fund manager Liontrust feels it has been hard done by over recent years. While its managers have taken the time and thought to craft entire investment philosophies - which they have insisted 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.

Three years ago, when most asset management stocks were in their prime, Liontrust's share price was plummeting, due to a period of poor performance in several of its funds. More than £1bn in assets eventually walked out the door over the course of just a few months, as the company's clients lost patience. But the group's insistence that its strategies would eventually deliver results has finally started to ring true over the past few months. The company generated performance fees of more than £2.5m on a series of institutional accounts over the last nine months of 2006, increasing its operating profits for the period by almost 40 times compared to 2005. Although the business is still losing more assets than it is gaining, its latest improvement in performance should start to reverse this position. Valued at less than 15 times this year's forecast earnings, the stock is trading at a discount to many of its peers. But investors should expect to see this start to unwind over the coming year. Buy.

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