Investment: Logica earns its place in IT premier league

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The Independent Online
IT HAS TAKEN some time, but British fund managers are learning to distinguish between good and bad information technology stocks. After buying indiscriminately in the first half of the year and then selling during the recent market turmoil, a premier league of IT services companies is beginning to emerge.

Logica fits squarely into that category. It is strong in three fast-expanding markets - telecoms, finance and utilities - which accounted for 70 per cent of sales last year. It also has an ever-expanding international spread. This gives Logica the opportunity to sell the same service to different customers in different countries, taking the group closer to its target of 10 per cent operating margins.

What's more, Logica's growth is not so dependent on the need to upgrade systems for the year 2000 computer bug or the European single currency. Instead it is largely being driven by the introduction of competition in the electricity industry, the explosive expansion of mobile phone services and the growth of on-line banking and electronic commerce.

This is clearly paying off. In the year to June, operating profits rose by 27 per cent to pounds 35.3m on sales up 28 per cent to pounds 431.8m.

Another impressive feature was cash flow. Before acquisitions, Logica generated almost pounds 55m of cash in the year, which will stand it in good stead when searching for acquisitions. Martin Read, the chief executive, is hunting for deals that improve Logica's presence in the US and Germany, or bring the company a new product that it can sell to its global customer base.

Analysts yesterday edged up their forecasts to about pounds 55m. That puts Logica shares, which closed up 147.5p to 1,822.5p yesterday compared to their 2,300p peak earlier this year, on a forward earnings multiple of 34.

That's still an unjustified discount to Logica's peers such as CMG and Sema. Buy.

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