Bumper year makes Capita a buy

MacKenzie on the crest of a wave at Wireless; Return to profit suits menswear retailer Moss Bros
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The Independent Online

This year is turning out to a bumper one for contract wins for Capita, the outsourcing specialist. Yesterday the company announced a deal worth £430m, over 20 years, to provide administration services for The Children's Mutual, which provides savings services for children.

It was the third major contract win in as many months, taking the total value of business won in the first quarter of 2004 to £625m. That compares with the £615m won in the whole of 2003. Capita's record for a year's contract awards is about £1bn.

The company provides "business process outsourcing" (BPO) services, which means everything from admin to IT. As the company's chief executive Paul Pindar put it yesterday, the company does a lot of the "back-office, unglamorous work", allowing an organisation or business to concentrate on its main area of activity.

Capita started out as a provider to the public sector; now almost half of revenues come from the private sector. Unlike companies that compete for Private Finance Initiative work, another form of outsourcing, Capita does not go for contracts that require significant investment of the contract provider.

Capita has established itself as the leader in this country, with a 24 per cent market share. Its competitors, such as Accenture and EDS, tend not to be able to provide as wide a range of services.

The company's 2003 results, published in February, were pretty healthy, with margins of 12.3 per cent and turnover growing 20 per cent.

Surprisingly, Mr Pindar does not see a threat from growing evidence of companies outsourcing services to countries such as India, which offer much lower labour costs. Capita has a very small operation in India but does not see this as becoming a major part of the business.

Mr Pindar insists Capita is not interested in customers whose prime motivation is saving money. The shares closed at 312p yesterday, putting them on a forward multiple of 21. Given the growth prospects, that's still a buy.

MacKenzie on the crest of a wave at Wireless

The irrepressible Kelvin MacKenzie has even more to crow about. His Wireless Group broke into the black for the first time - a £2.3m profit for 2003 at the operating level (£2.3m), although there was still a sizeable if much reduced loss for the pre-tax figure (£10.7m, down from £19.0m).

The radio company has one big asset, the talkSPORT national station, plus a series of local stations. While Wireless is not a large company, the radio industry does not have many players, meaning that Mr MacKenzie's business is a second-tier competitor.

Wireless is kept in the news as a result of Mr MacKenzie's aggressive campaign to force the industry to change the way it measures audiences from a manual to an electronic method - these figures are the basis for advertising rates for different stations.

Wireless is suing the rest of the sector over the issue. It has already spent £1m on legal costs from this action and it estimates that £1.3m more will be spent before it gets to the High Court.

The claim is for £66m and Mr MacKenzie suggested yesterday that other radio companies make a provision for this legal action. It is turning out to be an expensive point to prove, but Mr MacKenzie, a former editor of The Sun, points out that £15m of annual revenue is at stake for his company.

Wireless seems unlikely to be part of the major consolidation that is predicted for the sector but it is quite likely to be bought by Rupert Murdoch's News International, which has an 18 per cent stake. Hold.

Return to profit suits menswear retailer Moss Bros

Moss Bros, the men's suits specialist, has smartened up its act since fighting off a takeover bid two years ago. The company, still controlled by the Moss and Gee families, almost lost its head during the "casual dressing" revolution but under its former chief executive, Adrian Wright, fought back by slimming down from 16 different chains to just three.

Yesterday, its full-year results revealed a return to profits for the first time in four years, thanks to the basic retailing disciplines instilled by Mr Wright. Better buying and sourcing, and designing more clothes in-house meant margins strengthened, while stocking better ranges helped like-for-like sales to stabilise.

Hitting market expectations of a £1m pre-tax profits (against losses of £2.5m last year) should help restore some much-needed credibility. Meanwhile, a strong start to its current financial year, with underlying sales up 9 per cent, means analysts' forecasts of £4m of profits for this year look within its grasp.

The City seems to like Philip Mountford, its new boss, as much as the company. Historically, the shares, up 1p to 58.5p, have relied more on speculation about why Shami Ahmed, who mounted the abortive bid, holds a 20 per cent-plus stake. But with earnings surging ahead, they look undervalued. Buy.