The Investment Column: Pioneering Capita is expensive but a good bet for the long term

Hanson shares have no further to run; No need to venture out of Forth Ports
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The Independent Online

When Rod Aldridge started his career in the post room of East Sussex County Council in the 1960s and began training as an accountant, he seemed destined to ascend the greasy pole of local government administration. But during a stint at the Chartered Institute of Public Finance and Accountancy, the public-sector accountants' body, he helped develop software to help local authorities organise their employees, and the resulting consultancy work formed the basis of the company that was to become Capita.

The business has grown by taking over administrative functions from local and central government and, latterly, private businesses. Capita collects your television licence, pays teachers' pensions, perhaps sends out your council tax bill, looks after criminal records and may well deal with your insurance claim. It also collects London's congestion charge.

And yesterday it was the best performer in the FTSE 100 on news that, so far this year, it has signed major contracts worth £843m in total. Half of that comes from Birmingham City Council, which is using Capita to plan a new software system to improve efficiency. As the work with Birmingham progresses, you can be sure Capita will find other services it can provide for the council.

The philosophy is that Capita and the outsourcer share the cost savings from working together. The company has still barely scratched the surface of what might be won from local and central government, particularly as the more difficult public finances push efficiency planning up the agenda.

In the private sector, expect Capita to win a big contract to look after Zurich's life insurance policies. And all the while, Capita is winning run-of-the-mill contracts to administer employee share-save schemes and other minor administrative tasks. The more work it puts through its giant call centres and business processing centres, the more profitable they are.

It is a virtuous circle, and Capita is a pioneer and market leader. Investors who want to own a slice will need to pay up, since the shares trade on more than 20 times earnings, but it is worth having for the long-term.

Hanson shares have no further to run

Enough already for the Hanson share price. It has kept hitting new highs as something approaching bid fever gripped the building materials sector, with RMC and Aggregate Industries having been taken over in the past couple of years and, most recently, BPB, the plasterboard maker, surrendering to the French group Saint-Gobain for £3.9bn in cool, hard cash.

Hanson, the world's largest supplier of sand, gravel and crushed rock, might eventually become a target. But it is also entering a more difficult period of trading, which suggests that a top might have been reached for the share price.

The company was able to boast yesterday that most of the price increases it has implemented over the past year have been accepted by its customers, offsetting the impact of sharply rising fuel and raw materials costs. The company also has a tight rein on costs. But the trading update contained enough disappointing detail to hearten bears of the stock.

The volume of aggregates sold by Hanson in North America in the past year was 4 per cent lower than 2004, weaker than rivals. And supplies to the UK construction industry, particularly bricks, have also fallen.

Overall, an 11 per cent increase in pre-tax profit for the year, while clearly a solid figure, represents a sharp drop from the half-way stage, when profits were running 28 per cent ahead. The outlook for the early part of 2006 is poor.

Hanson has very strong positions in important markets, but the valuation, on 13 times earnings, looks stretched. Sell.

No need to venture out of Forth Ports

This doesn't look much like a defence document, complained analysts at Panmure Gordon about yesterday's trading update from Forth Ports, operator of five ports on the Firth of Forth and Tilbury on the Thames Estuary.

Well, sorry, but Forth has not actually received a bid approach, so a business-as-usual update is entirely appropriate. Panmure, in common with others, is getting ahead of itself in wishing a takeover on Forth to match the foreign buy-ups of P&O and PD Ports in recent months. It was harsh to send the stock down 28p to 1,560p yesterday. An overseas bidder may well swoop on Forth, but it will have to be at a price that reflects the significant benefits yet to be wrung out of its property along the Edinburgh waterfront.

For as well as the ports business, which is trading well at the moment, particularly at Leith and Grangemouth, Forth is also an urban regeneration business. Rather than flogging off its unwanted land at the earliest opportunity, it is going to invest in its development as a new residential and commercial centre for the expanding population of the Scottish capital. It is a project that will pay dividends over the next two decades, especially as further land is freed up from the ports side.

The ports side is a safe business in most economic climes, since more than half its income is guaranteed by agreements with users. A dividend yield of just below 3 per cent might look modest for such a dependable business, but shareholders get the potential upside from the property investment instead. Hold.

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