Investment Column: Capita faces outsourcing uncertainty

Betfair; Domino Printing


Our view: Hold

Share price: 680p (+1P)

The idea of an outsourcing boom has taken a few nasty knocks in recent months. As we highlighted in recent columns, the thought that companies such as Capita would gain as the Treasury took an axe to spending and went searching for outsourcing-led efficiency gains has lost a lot of its sheen: witness rival Serco's unsuccessful attempt to secure rebates from its suppliers as the cutbacks started to bite. Others have simply gone bust.

The sorry saga highlighted concerns that that while the Government squeeze might drive higher volumes the way of outsourcers, the business it sends there way might not be very profitable. The outsourcing story was called into question once more when Capita issued its interim management statement last month. Its shares fell to their lowest level in more than a year after it warned that second-half sales would be hit by Government cuts.

At the time, Shore Capital analysts said that while management was right about the scope for "material growth" from public-sector outsourcing, the fruits of the efficiency drive might take longer than expected to ripen. Indeed, they went on to say that Capita's bosses may end up being disappointed by the "slowness of this process". But there is still potential in that long-term picture, arguing against a sell stance. Moreover, at 17 times forecast earnings for 2011 and with a yield of 3 per cent, according to Panmure Gordon, we do not think Capita is expensive.

We also liked the look of the iSoft Business Solutions acquisition, which was announced yesterday, and which will help to boost Capita's standing in the expanding and lucrative healthcare market.

The short term is uncertain, particularly in the context of the high hopes in the run-up to, and in the weeks and months shortly after, the general election. But hold, and keep an eye on developments.

Betfair

Our view: Avoid

Share price: 990p (-191p)

After racing to the front of the pack with its autumn flotation, Betfair was all but pulled up lame yesterday. The betting exchange's shares took a hammering as its first set of a results as a quoted company missed City forecasts.A World Cup-led summer boom has been replaced by lacklustre trading more recently, which won't be helped by the string of horse-racing meetings cancelled because of the cold.

Across the group, profit before tax for the first half fell by 19 per cent to £7.45m (although that was hit by one-off expenses related to the flotation). Overall revenues were 27 per cent higher at £213.3m, but underlying revenues – excluding "high rollers" who pay very high commissions to the exchange – rose by just 12 per cent.

That might look OK on the face of it, but Evolution Securities highlighted concerns about the decline in horse-racing revenues in the second quarter and it doesn't look at all good when you consider the enormous premium the shares trade at compared with other betting companies. They sit on an astonishing 49 times full-year 2011 forecast earnings, falling to 26 times in 2012. Betfair is an innovative company and a great success, but that's too rich for us even after the shares' fall. Avoid.

Domino Printing

Our view: Buy

Share price: 574p (+10.5p)

Domino Printing makes machines that print "variable information" labels – things like "best before" dates for food. And a good business it is too: yesterday the company boosted pre-tax profits by 86 per cent from £28m to £52m in the year to the end of October, beating City forecasts. It also posted its 32nd consecutive year of rising sales. The outlook, too, is rosy with the company reporting rising demand.

Revenue is split with 40 per cent from machine sales, and 60 per cent from servicing, where the need for additional ink and maintenance means customers are locked in for the long haul. This means Domino has some protection from economic swings. It also has a good geographical profile, with a third of profits coming from fast-growing Asian markets.

The company has used the downturn to prepare for recovery by upping its research and development investment, and hiring again after it cut staff several years ago. It has no debt and investors will be happy with yesterday's 20 per cent dividend hike, the 25th year of dividend rises. JP Morgan Cazenove values the stock at 15.4 times estimated 2011 earnings, which is only a slight premium on the sector average of 15.1. The company looks good value for it. Buy

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory