Gamble of the week: Unloved office supplier
Phil Oakley Feb 11, 2013
At first glance, it’s easy to dismiss a business like Office2Office. Lots of office products have become commoditised over the years. So it’s difficult to see that this is an area where lots of money can be made. How the firm adds value to its customers businesses may not be immediately apparent either. Yet you can make money buying the shares.
The office-supplies business was originally part of Her Majesty’s Stationery Office (HMSO) and was spun off into a separate firm that became Office2Office. Supplying government departments with office supplies still accounts for a big chunk of the company’s profits today. However, the firm has come under pressure as the government’s cost cutting has reduced demand for office supplies.
Contract wins in the private sector have not been enough to stop group profits from falling. This has left the shares of Office2Office in a very depressed state. They have fallen by nearly 30% during the last year and are trading just 8% above their year-low. But this is exactly the kind of firm that can offer a money-making opportunity as long as profits have stabilised.
Office2Office (LSE: OFF)
While cutting costs, the firm has also been winning new business that should help profits grow over the next few years. It is broadening the range of products supplied and, outside of office supplies, it is also winning new contracts to manage other companies’ communications, such as printing advertisements and digital marketing.
It has a growing business in electronic data, shredding paper documents and waste recycling, and has recently started a logistics business to deliver office products for independent dealers. A lot of the revenues from new contracts in these businesses can be serviced from the firm’s existing cost base. This means there’s a good chance profits will grow and make the firm less reliant on its old business.
So is Office2Office poised for recovery? It could well be. And if it is, then the shares look very cheap. City analysts are currently forecasting earnings per share of 15.7p for 2013, which puts the shares on a price/earnings ratio of just six times. Management has also maintained a dividend per share of 11.4p as a sign of its confidence in better times ahead. This means the shares offer a dividend yield of 12%.
These big yields are often too good to be true and investors can get hurt when the dividend is subsequently cut. Office2Office’s dividend cover is thin and so a cut can’t be ruled out. But if the new contracts increase profits as much as they should, the shares may be worth a gamble.
Verdict: speculative buy at 95p
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