The market is beginning to be won around by Capita, though it is taking some time. The shares fell sharply in February when the outsourcing specialist admitted that its pipeline of potential work was down sharply and that the average length of contracts was falling too. Capita’s investment case is based on continuing organic revenue growth that is added to by small acquisitions, and there were concerns that it was in a trough year, with new work not coming in the door fast enough and a lower rate of deals after last year’s £157 million purchase of Avocis on the Continent.
The company said at the annual meeting yesterday that contract wins so far this year totalled £458 million, as against £1.2 billion for the same period last year. This is not entirely a fair comparison, because that period included £700 million from the Department for Environment, Food and Rural Affairs’ science partnership contract. However Capita accepts that some potential clients are taking a little longer than before to make up their minds.
Capita is in any event increasingly relying on small wins, often from cross-selling to the same clients, that do not register on the radar screen. There are no big contracts coming up for renewal this year, there is a big Ministry of Defence decision expected by the end of it, and the next important renewal is next year, the Department for Work and Pensions’ independence payments contract.
All this suggests that as the year progresses, the picture will brighten. Some analysts worry about a rights issue to kick-start that acquisition programme; Capita appeared to be doing its best to play down the suggestion yesterday and I doubt it. In February the company edged up its margin forecasts for this year, another source of concern.
It is sticking to forecasts of 4 per cent organic revenue growth at least this year, a bit behind that of last year but still attractive enough for a compounder that should be able to raise revenues and margins year on year. The short-sellers have been hitting the stock, and the shares, up 54p at £10.78, are still sitting at a two-year low.
They sell on more than 14 times earnings for this year. That does not suggest an immediate “buy” given the residual market doubts.
MY ADVICE Avoid for now
WHY The picture will improve as the year progresses and work builds up again, but the shares do not yet look ready to make progress
Hiscox
Hiscox has been making it as plain as any company can that its priority is to recycle its growing income stream rather than hand cash back to shareholders, so the market’s reaction when it cut the 2015 special dividend by two thirds in February was an odd one, marking the shares back sharply.
While pressure on insurance rates continues, the market as a whole seeing a further 4 per cent decline in the first quarter, Hiscox is identifying plenty of niche areas to exploit while steering clear of the more competitive catastrophe business. Meanwhile that catastrophe environment is fairly benign, the company seeing minimal effects from the earthquakes in Ecuador and Japan, UK spring storms and, most recently, the fires in Canada. Across the group, gross written premiums were ahead by an encouraging 10 per cent in the quarter, with particularly strong performances from US retail, driven by some disruption in the insurance industry there, and at the reinsurance division.
In the UK and Ireland, premiums were up by 6 per cent, a creditable recovery in a difficult market, with the increase in insurance tax and the need to chip in to the Flood Re scheme hitting margins. Hiscox has a strong reputation among London underwriters, and the rating on the shares has tended to reflect that.
The yield on the shares this year will not amount to much, of course, and the shares, up 17p at 947p, are still well below the £10.40-odd they peaked at in February. I have suggested before that they represent good longterm value, and this looks like an opportunity.
MY ADVICE Buy long term
WHY Recent price reverse makes shares attractive
easyJet
Buying airline shares has over the years been a pretty reliable way of losing money, as the business cycle turns again and losses mount — even Warren Buffett has struggled to turn a profit, and he once joked that a farsighted investor would have done his successors a favour by shooting Orville Wright down at Kitty Hawk.
This may be changing. The success of Ryanair and easyJet in setting up pan-European networks that have the benefit of high operational gearing as those networks are built out suggests that they may be creating an investable model. EasyJet’s halfway numbers were fairly irrelevant, as ever, though the omens are good for the summer as the airline specialises in the sort of beach destinations that people are still going to.
The decision to raise the dividend payout ratio to 50 per cent, though, no matter how it came about, is a game changer. This puts the shares, up 40p at £15.10 but still at the bottom end of their trading range over the past year, on a prospective yield of 4.8 per cent, substantially more than you would get from International Airlines Group, the British Airways owner, and with less potential downside, I would suggest.
MY ADVICE Buy for income
WHY The yield is an attractive one for an airline stock
And finally ...
It is, I have suggested, not difficult to make money in today’s motors market, when customers are being tempted by attractive financing deals from European manufacturers. Cambria Automobiles is an AIM-quoted company that is sometimes overlooked. The halfway figures show Cambria doing particularly well in the second-hand market, with a high return on investment, leading to upgrades from a couple of small brokers. The company has ambitions to double revenues in the medium term to £1 billion.
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