The Investment Column: Carillion is building on solid defence

Royalblue

Our view: Buy

Share price: 314p (-3p)

Private Finance Initiatives may be controversial but they can certainly be lucrative. Carillion, a construction and support services group at the forefront of the government initiative, unveiled its latest multimillion-pound contract yesterday.

The company, led by chief executive John McDonough, sealed a mandate from the Ministry of Defence to redevelop, manage and operate a 43-acre site at Northwood, which is home to the Chief of Joint Operations, Fleet and Nato headquarters.

The contract is worth £880m to Carillion over 25 years. In the first five years, construction will generate revenues of £150m, while support services will bring in almost three times that amount.

The latest contract win comes just two months after a consortium 50 per cent-owned by Carillion bagged the so-called "Allenby Connaught project" - a massive £12bn, 35-year mandate from the MoD to build and run new working environments for soldiers in Aldershot and on Salisbury Plain, and those returning from Germany.

These two big contracts from the MoD give Carillion a clear market lead in defence-related PFI projects.

Its management has transformed the company from a traditional construction business in a group where two-thirds of its revenues are derived from support services.

Carillion completed a £313m takeover of its smaller, struggling rival Mowlem in February to create one of the biggest infrastructure services groups in the country.

Costs savings from the deal are slated to be £10m a year by the end of 2006, rising to £15m by 2007.

In February, Carillion's shares stood above 360p each. Last night they closed at 314p, valuing the company at £881m.

According to Emma Ormond at the company's broker, Oriel Securities, the shares are trading at around 14 times expected earnings of 22.6p for this year and around 11.6 times forecast 2007 earnings. Set against a sector average of around 13 times 2007 earnings, the price looks modest. With no sign of the PFI slowing, they are a buy.

Royalblue

Our view: Buy

Share price: 752.5p (+18.5p)

Royalblue showed its true colours in the first half of this year by delivering its best organic growth in a decade.

The stock should already be well known within investment circles as it provides the Fidessa trading system and market data service used by traders across the globe.

A sharp increase in the number of customers using Fidessa underpinned yesterday's results and prompted an upgrade to the company's full-year prospects. It now expects modest improvement on last year's 24 per cent growth rate that resulted in revenue of £74.2m.

Interim results included organic revenue growth of 30 per cent to £44.4m, ahead of forecasts and the fastest in 10 years.

The improvement was founded on a commensurate surge in customers, more of whom are happy to renew subscriptions. Recurring revenue now represents 71 per cent of Royalblue's sales, lessening the company's reliance on attracting new customers to grow revenues quickly.

A slight decline in European profits was offset by strong growth in all other territories. Some analysts noted that the massive Japanese market is still at the early adopter stage.

The shares trade at more than 24 times forecast earnings, which may make them appear pricey.

But investors should not be deterred. The company looks set to continue to grow its revenue, win customers and expand its product range. With recurring revenues on the rise, Royalblue investors are unlikely to be singing the blues.

Nestor

Our view: Buy

Share price: 125p (+0.5p)

Nestor Healthcare is spinning off its struggling healthcare staffing business into a newly formed company, Pinnacle Staffing Group, which will be separately listed on AIM.

That will leave Nestor focused on social and primary care - providing home nursing services for the elderly and infirm, as well as out-of-hours doctors' services to Primary Care Trusts.

The demerger is a sensible move, given the difficult staffing market caused by NHS budget constraints, and should lead to a re-rating for Nestor shares, which have risen since the plan was made public in early July.

Yesterday's half-year results again highlighted why the company should steer clear of staffing, which posted a small loss while social and primary care put in a strong performance.

Staffing firms are among those worst hit by NHS cutbacks as budget overspends force hospitals and trusts to slash support staff and spend less buying in expensive doctors and nurses through private sector agencies.

Nestor has won home-care contracts worth £10.6m in recent months and is in the process of expanding its out-of-hours activities into dentistry and pharmacy.

It should benefit from the Government's desire to see more independent healthcare providers assisting trusts. The shares are well worth a punt.