Share tip of the week: an unlikely-looking winner
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For all the bad press it's received lately, this stock may seem an odd tip. But controversy and lost contracts aside, this company's range of services mean it will be protected from any possible consumer-driven slowdown.
Capita Group (CPI), upgraded to BUY at Merrill Lynch
At first blush, Capita might seem an odd tip. The outsourcing group has only just suffered the indignity of losing its prize contract to administer London’s congestion charge to IBM (France’s Thales was the third bidder). The company was also beset with controversy last year when its chairman Rod Aldridge resigned after it emerged that he had lent £1m to the Labour party. But brokerage Merrill Lynch has upgraded its prospects for Capita on the basis of likely new contract wins. Three mega-tenders are likely to complete before the end of the year (involving Prudential, the BBC and Glasgow City Council) and Merrill analyst Andrew Ripper reckons Capita is in with a shout on at least one.
Capita is the UK’s biggest business process outsourcer and provider of professional services. It caters to both local and central government, and to other sectors including education, financial services, transport and health; its services range from back office administration to treasury, policy administration, software, property and infrastructure. The group is well positioned to benefit from the trend of both the public and private sectors to concentrate on ‘core competencies’ and outsource other activities. Its interim results for the half year to June 2007 saw turnover up by 17% and operating profit up by 20% to £119 million. As a sign of the board’s confidence in the company’s prospects, the interim dividend per share was raised by 48% to 4p.
Given the extent of its range in services, Capita seems well protected from any possible consumer-driven slowdown on the back of worries over the mortgage and property markets, and its clients are a largely robust mix of public and private interests. Those are the sorts of ‘safe haven’ characteristics that interest me, given the uncertain macro-economic backdrop. The market would seem to agree: its shares have risen over the past year from 550p to 750p, which is where they are currently consolidating. That puts the company on a forward price/earnings ratio of 26, according to Bloomberg analytics, which is admittedly challenging. But seven brokers rate the stock a ‘buy’, with five advocating ‘hold’ and just one, Andrew Darke at Evolution Securities, recommending ‘sell’.
Recommendation: AVERAGE IN over the coming weeks
Tim Price is CIO of Global Strategies at Union Bancaire Privée, London. Tim also runs his own share-tipping service, The Price Report.
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