The Investment Column: New chief has IT group Logica singing in tune
Paypoint; Air Partner
Friday 15 August 2008
Our view: Buy
Share price: 127.75 (+15p)
Change is in the air at the IT consulting and outsourcing group Logica. The biggest and most obvious example was the arrival at the start of the year of a new chief executive, Andy Green, from BT. Since then, a company that was a rather disparate collection of divisions assembled over time through acquisitions has slowly starting to sing from the same hymn sheet.
Yesterday's announcement of Logica's interim results, which not only showed a 21 per cent hike in operating profits but also reported revenue slightly ahead of previous estimates, went some way to proving that the change had been needed. The update got the market going, with a 13.6 per cent rise in the stock.
However, investors may be justifiably cautious. The group has not performed well in recent years, largely due to precious little thought being applied to new acquisitions. Those who bought the stock at 190p last summer have lost out, particularly when the group scaled back revenue estimates in November.
Enter Mr Green, Logica's saviour.
He reacted to problems in a predictable enough way by announcing a "business review" designed to "improve returns to shareholders". However, there has also been action to back up the rhetoric. More money is being spent on client work, while cuts are being made in the back office. This will no doubt help as customers look to cut costs during the downturn by increasing IT outsourcing.
In terms of valuation, the group's discount is offset by its £565m debt, say analysts at Evolution Securities. "Logica is rated at 10.5 times net income but has significant debt, meaning the adjusted rating for the stock is 12.5 times, broadly in line with the European IT services average." However, the group's exposure to the euro is a good thing given sterling's weakness, they say, arguing that clients should buy. Investors have a right to be cautious, but things do appear to be changing for the better at Logica. Buy.
Our view: Cautious hold
Share price: 600.5p (-36p)
Paypoint, which operates bill payment and mobile top-up services, issued a trading statement yesterday that made great play about the fact that revenues between the end of March and July were up 11 per cent on a year earlier. Aside from that, bill payment transaction volumes were up 10 per cent to 163 million and earnings were in line with expectations.
That is the good news. However, despite what appears to be on the surface a rather decent, if unremarkable, update, the stock tumbled 5.7 per cent as the group also announced a delay to the launch of its expansion in Romania, and said top-ups were slow.
The chief executive, Dominic Taylor, argues that the group's systems are not really used for discretionary spending, and thus the company avoids the teeth of the credit crunch: growth in other areas like internet payments and pre-paid debit cards shows that there are other potential sources of revenue, he adds.
In fairness, investors have had a fairly decent run as far as Paypoint is concerned. Unlike most, the company's stock has actually risen in the last 12 months, and watchers at Citigroup reckon there is still room for more, with the group trading at a 22 per cent discount to rival Euronet on a 2009 price earnings basis. It is also rated below "most of its peers," they say.
Investors should, however, be concerned that the market reacted as badly as it did yesterday to what was essentially a neutral trading update. The group is exposed to the downturn in consumer spending and, as UBS points out, hikes in energy prices and a reduction in footfall at the Post Office will hardly help. Cautious hold.
Our view: Hold for now
Share price: 885p (+12.3p)
For a company linked so closely to both the troubled aviation sector and to financial services, Air Partner, which organises bespoke flights, is doing pretty well.
The group said in a trading update yesterday that sales and profit growth would be up 30 per cent and 20 per cent respectively, for the full year. As the company depends on corporate clients for 60 per cent of sales, this is impressive and is largely the result of the group trying to attract more government-sponsored business and high net-worth clients, as well as expanding overseas.
The group's customers now include the NHS for organ transportation, as well as still stranger commissions, such as flying 14 train carriages across the Pacific.
The chief executive, David Savile, concedes that the start of a new financial year is always a bit scary and that with the economy in trouble, some areas of business could be a little softer. He argues, however, that group has a strong record of growth even during a downturn and has a record of paying at least 10 per cent dividends: five special dividends have been doled out in the last eight years.
The group has no listed competitors, but Mr Savile says that new investors should forget short-term gains and back the company over the long term: with the share price where it is, now is a good time to buy, he says. We are inclined to be a little more cautious. Hold for now.
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