The halfway figures from Capita were always going to be horribly messy. The company was forced to restate its figures for 2016 because of changes to accounting standards that were aimed to reflect the short-term impact of long-term contracts.
The company announced this month that on the new basis profits for last year would have been almost a third lower. This cleared the way for interim results that were drawn up using the new accounting standards.
They did, however, contain large write-offs from exiting businesses and other provisions. These include the cost of selling its asset services side in the summer for £888 million, a deal which took the pressure off the balance sheet and probably obviated the need for a rights issue.
There is also a £37 million provision against a possible fine from the Financial Conduct Authority from Connaught, a fund that collapsed in 2012 three years after Capita ceased to administer it. It is assumed this will cover the damage but there could be a further one-off loss because one of the company’s big life and pension clients is debating amending or terminating the contract. Against this, there is a £16 million one-off benefit from some Ministry of Defence work.
Organic revenues were off by 0.5 per cent, offset by 1.5 per cent brought in by small acquisitions. Operating profits were ahead by 38 per cent to £228 million but that red ink below the line left reported pre-tax profits of £28 million, down from a figure of £37 million last time also impacted by one-offs.
There is a surprising £72 million reduction from the sum due in by the end of the year from that asset services business, made up in part by a £17 million pension contribution but also by unspecified fees involved in the transaction. When the balance is in Capita will be on track for its target of debt of 2 to 2.5 times earnings, which is comfortable enough, while the business has been refocused and reorganised on more sensible lines.
The shares fell by 74½p, or almost 12 per cent, to 569½p on disappointment that there is no new chief executive yet and a cautious outlook statement. Tempus has read Capita right throughout this year, recommending a buy at the start of it as a clear recovery stock at 531p and then suggesting investors take profits at 705½p in June, at the top of their range. Though the shares are on less than 12 times earnings, this does not look like time to buy again.
MY ADVICE Avoid
WHY The shares are back to close to their level at the start of the year but Capita is still capable of springing further bad news on investors
Biopharma Credit
Of all the specialist funds that have come to the stock market in recent years, with an aim to buy assets generating income and recycle this to investors as dividends, Biopharma Credit must be the most singular. The float in March, raising $761.9 million, was well oversubscribed, the fund having aimed at $300 million, and at the time it was the biggest of the year.
It invests in biotech but in new debt raised by companies in the sector, some of it secured on the rights to future royalty payments, and not equity stakes. Oh, and the shares are listed in London but quoted in dollars, which seems acceptable enough to investors and limits currency risk as the loans are also in dollars.
Biopharma came to the market with seed assets of $338.6 million and $423.3 million of cash to invest. Since March there have been no investments made and the value of those assets fell by $66.7 million as capital was repaid, with a corresponding increase in cash.
That dearth of new investments reflects the earlier strength of shares in US biotech, which limits their need for the sort of debt Biopharma specialises in. It is hoped that the bulk of that cash will be deployed by March next year, given the talks with potential borrowers going on now.
The halfway dividend of 1 cent and the expected full year payment gives a dividend yield on the shares of about 4.5 per cent, but it is hoped that once the cash is invested this can rise to 7 per cent for 2018. An interesting proposition, even if capital growth may be limited.
MY ADVICE Buy
WHY The shares offer a solid and defensive dividend yield
IG Group
IG is the first to admit that the first quarter of its last financial year was an odd one. June to August, of course, covered the period just before the Brexit referendum and the fervid couple of months after.
An awful lot of punters, many of them relatively unsophisticated, signed up beforehand, convinced they could make a fortune. They bet in small amounts while IG was trying to ensure they did not lose their shirts by raising the amount they had to keep as a margin, which limited their potential downside loss.
The numbers signing up were unprecedented so it was inevitable that the numbers of clients fell by 3 per cent in the first quarter of this year. Revenue per client grew by 25 per cent as those low ballers got out in the interim period; total revenues for IG’s core products grew by 21 per cent. This skewed number disguises a rate of growth of, say, 5 to 6 per cent in the average quarter.
The main problem with IG and its rivals is the threat of tighter regulation. This is an imponderable, though it will benefit the more established players in the longer run and may be clearer in the new year.
The shares, up 29½p at 648p, sell on 13 times earnings but that regulatory uncertainty does not encourage a buy.
MY ADVICE Avoid
WHY Too much regulatory risk for sector as a whole
And finally . . .
The market has spent a long time getting to grips with President Energy and its activities in South America although demand in the region has ensured a profitable market for its oil and gas. The latest deal may change a few minds, though. President, which is focused on Argentina, is buying Chevron’s interests in the proven Neuquen Basin for just $400,000, with $15 million upfront to the local authority and another $7 million in due course. The assets are getting $55 a barrel for their output.
