The Investment Column: Loss of congestion charge won't leave Capita in a jam

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The Independent Online

Our view: Reduce

Current price: 729p(-13p)

Few Londoners will have shed any tears for Capita when it lost the contract to administer the congestion charge to IBM but the loss of a 56m a year deal, high profile though it was, is a drop in the ocean in comparison to the amount of new business the company has won this year.

Yesterday's trading statement from the business services outsourcing group was typically bullish. The company is confident that it will beat market forecasts for revenue for the full year, and with 1.9bn of new contracts already won this year there is little reason to doubt that prediction.

Recent big contract wins show just how much more there is to go for in the sector. Capita will administer 7 million mature life and pension contracts run by Prudential, worth 722m over the next 15 years, and 4.5 million unit trust and life policies for Co-operative insurance, worth 270m over the next 10 years. The total outsourcing market in the UK alone could be worth up to 95bn, meaning just 5 per cent is currently outsourced, and the development of major operations in India is also a sign of where the company sees its future growth.

But regardless of the strength of the trading statement, there were no new contracts mentioned, and given the strong newsflow Capita has generated that is something of a disappointment.

Clearly, Capita has a lot going for it. Its earnings are highly visible and reliable, and it is a market leader in a very lucrative growth sector. It almost sounds too good to be true so it probably is.

The shares are far from cheap trading on more than 24 times Citigroup's forecast 2008 earnings is a full price in any market, and all of the signs are that next year will be tougher than this. As more players enter its market it will find it harder to win new contracts losing out to IBM for the congestion charge contract has a fairly ominous ring to it.

To a certain extent Capita is a victim of its own success. As a well managed business that has consistently beaten market forecasts, its shares trade at a substantial premium to the market. But at this stage of the market cycle the sensible advice has to be to err on the side of caution and reduce exposure to highly rated growth stocks.

Colt Telecom

Our view: Sell

Current price: 190.25p (+8p)

There has been great deal of excitement around perennial telecoms underachiever Colt Telecom over the past few days after a press report suggested that AT&T was in talks with Fidelity Partners, which owns 65 per cent of the UK company.

The shares remain 15 per cent higher despite Colt distancing itself from the story. Investors took a "no smoke without fire" view and Goldman Sachs lifted its rating to neutral on the basis that bid speculation would continue to support a higher share price and that there is strategic rationale for AT&T to make the move as it would lower the cost of access for its European corporate customers.

There's little doubt that Fidelity would be more than happy to sell out of Colt, especially at the 300p level quoted in speculation, and there has been significant consolidation in the UK alt-net sector, most notably with Fibernet being gobbled up by Global Crossing and Easynet falling to Sky over the past few years.

But Colt's market cap of over 1bn makes it quite a large fish to land, even for a company the size of AT&T. And if AT&T were interested, why it would choose to strike now with the US dollar in the doldrums, the credit crunch looming in the background and Colt's stock so much higher than it has been for months? Hanging on for a bid could pay off, but it could prove a long and frustrating wait. Investors should take what is on offer now and sell.

ReNeuron

Our view: Risky buy

Current price: 23.5p (-0.25p)

Stem cell research has, so far at least, been yet more jam tomorrow for the biotechnology industry. Here we are, seven years after the human genome project was supposedly complete, and the entire biotech industry is yet to make a penny from it.

However, ReNeuron could change that. Although yesterday's interim results showed a marginal financial improvement, the focus is on its ongoing stem cell drug REN001, which the company hopes to move into human trials by the middle of next year.

The US Food and Drug Administration will decide in 30 days from Friday whether or not human trials can begin. Stroke-damaged patients will then be recruited to have stem cells literally injected into their brains. The hope is that the new cells will at least partially repair those damaged by strokes.

There are estimated to be 50 million stroke survivors globally, half of whom will be left permanently damaged. Currently, survivors can sometimes be prescribed treatments that may prevent another stroke, but that is as good as it gets.

But before we get carried away, potential investors need to know that even if the trial is successful the company is probably still a minimum of three years away from bringing a treatment to the market. Before then it will need to raise more money, and will probably do so if it gets the green light to go ahead with trials.

This is about as high risk as investing in public markets gets, but if ReNeuron hits paydirt it could be worth many times its current 36m market capitalisation. Not one for anyone other than investors with a huge appetite for risk but at least the next stage of development is less than a month away.

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