Investment Column: Good news already priced in to Petrofac

Xchanging; Infoserve

Edited,James Moore
Thursday 17 December 2009 01:00 GMT
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Our view: Hold

Share price: 978.5p + 7.5p

While the rest of its sector faces a profits squeeze, the Aberdeen-based oil and gas services group is forecasting pre-tax profits will soar by 25 per cent this year, thanks to new contracts worth approximately $6bn (£3.7bn). Profits after tax will come in at an analyst-beating minimum of $330m.

Petrofac's backlog of orders surged to around $7.8bn by the end of the year, nearly double last year's $4bn. The group chief executive, Ayman Asfari, is equally upbeat about the future. "The high level of backlog we are now carrying gives us excellent revenue visibility for next year and beyond," he said yesterday. "We look forward to the coming year with considerable confidence."

The company's strength lies in its breadth of interests. It does everything from engineering and construction to facilities management and training, and its business operations range from the North Sea's Don field, with partner Valiant Petroleum, to service relationships with international majors and a growing number of national oil companies.

The group undoubtedly has some strong prospects. Production at Don has totalled 3 million barrels this year and is expected to double to a peak of 30,000 barrels per day in 2010. On top of that, a strong bidding pipeline, including a string of deals across the Middle East, promises further growth.

But with a share price that has already more than doubled over the past 12 months, now is not the best time to buy. The shares are sitting on a price-to-earnings ratio of 16.6 times this year's forecast earnings, falling to 12.8 times in 2010, according to estimates by Evolution Securities. This means that the stock is not unattractive when compared with the rest of the sector. But given that surges of growth such as that Petrofac has seen in 2009 tend to be followed by periods of consolidation, a lot of the good news is already priced in. But hold.

Xchanging

Our view: Sell

Share price: 206p (unchanged)

Xchanging is one of those frightfully boring businesses that seems to feel the need to adopt a jazzy name just to wake its employees up. They were certainly given a jolt yesterday when 250 of them were fired with a further 230 offshored to India. At least the outsourcing specialist, which handles all sorts of rather dull work for banks and insurers and other companies, is practicing what it preaches.

The job cuts are part of plans to trim costs by up to £17m a year by 2011, at the cost of a one-off hit of £17m on this year's numbers. Apart from this they will be more or less inline, Xchanging said yesterday. Which doesn't amount to much. Growth has been torpid (Nomura says it amounted to about 4 per cent in the first half) and there has not been a big Enterprise Partnership contract win since 2007. One of these could boost shares, which are hardly expensive at 11.4 times next year's forecast earnings, though the forecast yield is only 1.6 per cent. Capita, by comparison, expects a lofty 17 times next year's forecast earnings.

But is it worth waiting? The shares are down on the year, while the market is up, and they have been idle over the last six months. The cost cutting will be welcomed by investors, but elsewhere there appears to be little momentum. Governments are mad keen on outsourcing, but corporates appear less so (for now). As a result we say sell. There are better opportunities elsewhere.

Infoserve

Our view: Speculative buy

Share price: 6p (unchanged)

Investors in Infoserve, the online local search specialist, have had a rough year. The stock closed at 6p last night, down more than 70 per cent since January, when it was trading above 24p. Yesterday's first-half results failed to make much difference, with the shares closing flat despite the company reporting £200,000 in losses before tax, an improvement of more than £400,000 on 2008. There was no dividend, as Infoserve is concentrating on developing its business, which is to help small companies bring their products and services to the attention of customers making targeted local searches on the internet.

The bears will no doubt emphasize that the company will cease to be an authorised Google Adwords reseller from the beginning of January, but this has little practical impact as Infoserve will continue to sell and organise Adwords campaigns for its customers.Not only that, but online advertising, particularly search-based advertising, is a growing market, and Infoserve, with its focus on targeted searches, seems geared to one of the most fertile parts of that market. But the economy is still fragile, and advertising revenues, whatever the split between online and offline, may come under renewed pressure in the event of a double dip. Nonetheless, we're willing to take a gamble. Speculative buy.

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