Investment Column: Capita set to benefit from state outsourcing

Inmarsat; Avon Rubber


Our view: hold

Share price: 775.5p (-24P)

Regardless of what sort of government we get, and how long it lasts, one thing that is abundantly clear is that public spending will be slashed to lower the gargantuan budget deficit.

This bodes ill for some companies (defence contractors, for instance, may be hit as the country pares back) but is positive for outsourcers such as Capita, which stands to gain from the impending efficiency drive. The company, which, among other things, collects television licence fees, is alive to this opportunity and said yesterday that it expected outsourcing to "play a key role" in the new government's bid to put a leash on spending.

That said, the political picture is uncertain, with little clarity about whether cuts will be start this year or next. The short- to medium-term case for Capita, then, seems to rest on the valuation, in our view. Let us begin by contrasting Capita with Serco, another widely followed outsourcer.

Looking at the picture over the past year or so, more consistent end markets have helped Serco to steal a march on Capita's shares, according to recent analysis by Credit Suisse. Serco also appears to offer less in the way of upside, which the broker estimates at 17 per cent in terms of Serco and 20 per cent in terms of Capita. Capita is trading on 18.7 times forecast full-year earnings. The Credit Suisse analysis puts its historical trading range at between 15 to 24.

So Capita is not particularly expensive but neither is it so cheap to offset the short-term political uncertainty that faces it and its business model. In July we said buy the shares at 695p. They are now at 770p, so they've done us proud. We wouldn't be buying any more at the moment, but this is a company we believe should reward those who hold over the medium term.

Inmarsat

Our view: Hold

Share price: 759.5p (+0.5p)

Inmarsat is an example of a business whose services came into their own in the last quarter. It provides voice and data satellite services to ships, aeroplanes, the military and other workers in remote areas. As such, demand for its services shot up as a result of the earthquakes in Haiti and Chile, so it produced some very good results.

Mercifully, however, such events are rare and revenues from land-based voice and data users will inevitably be volatile. So how are the more predictable parts of Inmarsat's business doing? It's a mixed picture. People on ships are making fewer calls than they were, and the lost revenue is only just being offset by them turning to alternatives such as email. To accelerate the development of this business, Inmarsat has hinted it could move to satellite broadband technology, but that would require heavy investment.

Aeronautical services are growing very quickly and would boom if mobiles phones were allowed on flights, but at the moment the base is quite low. Strategically, we like the company's use of cashflow to pay down its debt. Also, its earnings before interest, tax, depreciation and amortisation rose by 22.8 per cent to $144.1m, when the market had forecast $130m.

Those who followed our advice to hold the shares at 621p in November did well. With the stock trading on 23 times this year's forecast earnings (falling to 19.6 times next year's), it is not cheap and has been fattened by bid rumours. We wouldn't blame anyone for taking profits but we still think Inmarsat is a solid, long-term hold.

Avon Rubber

Our view: buy

Share price: 93.5p (+8p)

What links diary farmers and infantry soldiers? Not an awful lot, you would be right in thinking – apart from rubber, that is. Avon Rubber makes a range of products from those found on the farm, to gas masks that are used by troops. Yesterday, its shares jumped by a stunning 8.8 per cent after it reported a storming 48 per cent increase in first-half profits.

In fact, there was nothing but good news in the statement: Avon's order book is in healthy order, while the management declared itself upbeat about prospects for the coming months. If there was a fly in the ointment it was that the stock increased by so much, putting the shares on something closer to fair value than they had been earlier. There is no dividend, so any new investors will depend on an upwardly mobile share price.

But worry not, analysts at Arden say there is still room for growth. Avon's shares trade on a 2010 price to earnings ratio of 10 times, they say, implying a fair value share price of 123p. While valuations are not always necessarily met and things can go unexpectedly wrong for small companies such as Avon, we see no reason not to invest in the shares. Buy.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?
How Tansy Davies turned 9/11 into her opera 'Between Worlds'

How a composer turned 9/11 into her opera 'Between Worlds'

Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece