Investment Column: Lambeth deal confirms Capita's strengths

Millennium & Copthorne; WSP
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The Independent Online

Our view: buy

Share price: 711p (-1.5p)

Capita bosses were doing the Lambeth walk yesterday as they picked up a £60m, 10-year contract with the London borough to deliver a range of services. The scope of the deal could be widened to make it worth up to £300m over time.

The work was won after a competitive tender, but it extends an existing relationship and will see the outsourcing group running the council's call centres and collecting revenue, among other things.

We've been sceptical about the predictions of an outsourcing boom as Government – both central and local – urgently seeks savings as funding is slashed. When we last looked at Capita at the end of 2010, the group had warned that the cuts would hit second-half sales. Not a big surprise: even if the Government austerity drive leads to more work for outsourcers, it may not be as profitable as before.

Still, while others reliant on Government work for revenues have been feeling the pinch – we've already seen some go under – Capita looks like it will be a survivor.

And yesterday's win is a demonstration of strength. In fact, as Seymour Pierce points out, in the first four months of the year Capita produced contract growth of £313m. That is not to be sniffed at.

When we last looked at the shares, we said hold, despite the fact that they had fallen sharply to 680p. They subsequently recovered, but have recently been trending sharply downwards, having hit highs of over 750p just over two weeks ago.

We now feel that there might be a buying opportunity here. The numbers Capita has been putting up are impressive. They suggest that the company might well be one of the few winners from the Coalition Government's austerity drive.

And at 14 times forecast full-year earnings, the shares are not terribly expensive either. They are, in fact, a shade cheaper than rival Serco, which trades on multiples of 14.3 times on Seymour Pierce's estimates. We would therefore use the shares' recent slide as a buying opportunity. Tuck in.

Millennium & Copthorne Hotels

Our view: buy

Share price: 486p (+4.5p)

Thus far, we've been content to hold Millennium & Copthorne. Our stance, which was outlined late last year, was down to the surge in the hotelier's share price in the months before our note. The company was doing well, but the shares appeared to reflect much of that performance and, more importantly, the positive outlook.

Since then, things have cooled down. In fact, if you pull up the price at the beginning of this year and compare it to current levels, you'll notice that the stock is down sharply over last six months or so.

Indeed, you'd think that something had gone badly wrong at Millennium, which yesterday named its finance boss, Wong Hong Ren, as its next chief executive. For our part, we can't work out what exactly has gone wrong that would warrant a slide of more than 15 per cent since January.

The hotels' recovery story remains intact, with updates from peers and industry indicators all pointing to continued gains for the sector. Millennium is all the more attractive for its exposure to the booming Asia Pacific region, and Mr Ren's promotion is welcome, as it is unlikely to prompt a sudden change in the company's strategy. He is a veteran of the business, having been both joint chief executive and interim chief executive in the past.


Our view: sell

Share price: 260p (-53p)

It may be involved in big projects such as the the Shard in London but WSP saw its shares suffer a sharp decline after a profit warning ahead of next month's half-yearly results.

The engineering consultant said it now expected performance for 2011 to be worse than the year before, blaming a drop in public-sector spending in the UK that has particularly hurt its transportation unit. And while the impact of public-sector cuts is hardly a revelation, the real problem, in our view, seems to be that the private sector is not yet compensating for the hit.

The fact that WSP's operations outside of the UK provide nearly two-thirds of revenues is positive, but, as Espirito Santo analysts note, the group "does not have sufficient exposure to areas of spend which are currently showing recovery, such as Middle East infrastructure and UK regulated spend". This makes us cautious about the stock.