Investment Column: Investors fail to buy Logica's argument

Travis Perkins; RSM Tenon
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The Independent Online

Our view: Hold

Share price: 137.5p (-7.8p)

Full-year results from the IT outsourcer Logica yesterday were a mixed bag. Revenues were up by 1 per cent to £3.7bn for the year to December. And although operating profits more than tripled to £211m, adjusted operating profits were flat at £272m when the impact of last year's exceptional charges were stripped out. The market was clearly unimpressed, with the shares down more than 5 per cent at the close.

The Anglo-Dutch group tried to put a brave face on things, blaming lacklustre demand in key markets such as the UK and Benelux and stressing that efficiency measures helped keep margins at 7.4 per cent despite pricing pressures. The company is also forecasting revenue growth and margin improvement in the year ahead, although margins will dip in the first half, dragged down by a £30m restructuring charge.

"We finished 2010 in a strong position. The client and people-focused strategy that we established at Logica three years ago has helped us to weather the downturn well," Andy Green, the Logica chief executive, said, pointing to a string of contract wins so far this year, including a deal with the Serious and Organised Crime Agency.

"Our good performance and strong order backlog allow us to look to the future with confidence," he added. "We are well positioned for revenue growth and modest margin improvement as the market recovers through 2011."

The market for IT outsourcers is starting to improve as economic recovery breathes life back into schemes put on hold during the recession. And Logica's fourth-quarter revenue growth of 4 per cent points the way ahead. But Roger Phillips at Evolution Securities registered disappointment yesterday at both the first-half margin squeeze and "the vagueness of guidance otherwise". We are equally nonplussed. Hold.

Travis Perkins

Our view: Hold

Share price: 1,004p (-35p)

At first glance, the Travis Perkins share price appears to be out of step with the state of the construction market. The builders' merchant and DIY retailer is up more than 35 per cent since the beginning of September, despite mounting evidence that the sector remains firmly lodged in the doldrums.

But look at last night's full-year figures and the gains make sense. Travis, it turns out, has been doing well out of an uptick in repair and maintenance work that was put off during the recession. Of course, the business is under no illusions about contraction in the public sector, though the chief executive, Geoff Cooper, reckons that the private sector will help offset that contraction in the years ahead.

Although we harbour some doubts on that front, we think Travis should remain firm, partly owing to the repair work, and partly because it is well placed to grow market share.

It is also worth noting that the stock trades continues to trade on multiples of about 12.4 times forward earnings for this year, and less than 11 times forward earnings for next year. That argues against a sell stance. But our concerns about the wider economy make us wary. Hold.

RSM Tenon

Our view: Buy

Share price: 42p (-11.25p)

RSM Tenon's recent strong run, which has seen its share price rise by more than 40 per cent since last June, seemed to come to an end yesterday as the accountancy group failed to meet market expectations with its first-half numbers and investors left it significantly weaker.

On the face of it, the numbers do not seem so bad, with both its operating profit and turnover increasing by more than 50 per cent. Yet this can be largely attributed to the £76.3m acquisition of RSM Bentley Jennison at the end of 2009, with whom Tenon merged to produce the company it is today. Meanwhile, its margins were squeezed while cautious comments over its trading outlook also seem to have hurt sentiment.

Still, there does continue to be optimism that as the economy recuperates, RSM Tenon will reap the benefit. Although it may struggle to reach the heights that were once predicted for it, the group now seems rather undervalued, meaning that at this price there could be a decent opportunity. Buy.

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