Investment Column: Hold on to Logica, even as revenues fall

Our view: Hold

Share price: 121.7p (+6.6p)

Most companies are looking at any way to cut costs during the downturn, which puts a company like Logica, one of the biggest UK-listed IT service providers, in a strong position.

Yet, it has not been all plain sailing for the group, which sets out to save its clients 10 per cent in the first year, as its two main operations have experienced a rather different recession.

The growth has come in outsourcing, which the financial director calls the "key to riding this recession out," and is a business that has good visibility for future revenues. It provides clients with outsourced billing and payment systems and infrastructure management, and says its growth prospects are good as clients increasingly looked to Logica to manage more of their internal systems. The group also has firm control of its costs and is in the middle of a cutting drive, reducing headcount and selling off property, which has prevented particular margin weakness.

This was offset, however, by the market weakness in its consulting and professional services arm. As a result, Logica revealed yesterday that revenues in the third quarter had fallen by 4 per cent to £862m and added that it expects full-year numbers to fall by 3 per cent.

The group seems pretty well hedged with the two arms of the business and its clients well spread. As financial services clients have weakened, the public sector, energy and utility and telecoms have improved. It also has a solid geographical spread.

The group is bound to benefit if mergers and acquisitions return with a bang, and will be in prime position to help companies deal with a series of forthcoming regulations.

Yet, analysts fear that profit growth will not be huge next year and Evolution Securities rates the stock at 11.7 times prospective full-year earnings, which puts it in line with its peers. Probably worth holding for now.


Our view: Buy

Share price: 393.9p (+18.7p)

It has not been an easy year for FirstGroup.

Recession whacked commuter train travel to such an extent that the two London franchises – First Great Western and Capital Connect – have needed £70m-worth of revenue support from the Government between them. Thanks to the help, the rail division managed a 5 per cent rise in profits, according to yesterday's half-year results. But buses have suffered even more. Although revenues scraped up 1.2 per cent to £586m, profits were down by 15 per cent on falling passenger volumes. Overall, including the US business, FirstGroup managed profits down 14 per cent to £27m on revenues up 4.8 per cent to £2.9bn, in line with analyst expectations.

But Moir Lockhead, the chief executive, is still upbeat, and the board has boosted the interim dividend by 10 per cent as a sign of its ongoing confidence.

The plan for £200m in cost-cutting is on track, says Mr Lockhead. As is the plan to raise £100m in cash to pay down the £2.4bn debt that is still slightly spooking analysts even though it is financed to 2010, and – at three times ebitda – comfortably below covenant-triggering levels. "It is a good performance in a really tough economic climate," Mr Lockhead said yesterday.

Despite the recent difficulties, FirstGroup's business is balanced insofar as around half of revenues come from medium-term contracts not affected by the economy.

And the shares have underperformed the market by nearly 25 per cent, according to Gert Zonneveld at Panmure Gordon. With a price to earnings ratio of 9.1 times, and a yield of 5.5 per cent, FirstGroup is a buy.


Our view: Buy

Share price: 225.7p (+3.3p)

Cobham, the defence and aerospace electronics group, did not add much with yesterday's interim management statement.

Revenues for the first nine months have grown strongly, broadly in line with expectations.

And the company also provided a list of contract wins, only one of which – the $1.2bn (£726m) US army intercom – is anything out of the ordinary. Debt has jumped to £468m from £442m on account of payment of July's final dividend, adverse foreign exchange movements and deferred acquisition-related payments.

But Cobham's numbers are still respectable, with a price-to-earnings ratio of 10.9 times and yield of 2.9 per cent in 2010, according to number crunchers at Evolution Securities. The shares had a sluggish start to this year, before taking off in the last couple of months.

Although the near future is unlikely to carry on at such a pace, Cobham is still a buy.

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