When you are trading on the sort of multiple Capita shares enjoy, and are just weeks off hitting an all-time high, it is easy to disappoint. There were not a lot of negatives in the first half figures, but the market latched on to one, and the shares fell 15p to £12.71p.
Underlying revenues were up by 10 per cent, operating profits by 11 per cent to £288.8 million and the half-way dividend was raised by 9 per cent to 10.5p. Yet that revenue growth was boosted by acquisitions such as avocis, the continental European outsourcer bought in February and the company’s biggest ever deal. However, in the context of a company with a market capitalisation of more than £8 billion, a purchase price of €201 million was not a lot.
This meant that the rate of organic growth, 3 per cent, in the first half, undershot market expectations. There were good reasons for this. A contract to provide mortgage services for the Co-op Bank slipped into the second half, unsurprising given the problems at the bank. Capita has since bought the provider of software that will be used on that contract.
The company is preferred bidder for the £1 billion contract to provide administrative support for NHS primary care across England, but the formal award was delayed by the election. Work will probably start on September 1. This will mean that some of the expected growth will fall into the second half, and this and acquisitions will allow revenue growth of more than 10 per cent in 2015, accelerating into next year as work on those new contracts feeds through.
Capita has a good record of winning such big, complex outsourcing work and has avoided the pitfalls that have hit rivals such as Serco and G4S of late. Contract wins, its bid pipeline and that revenue growth are the best ways to judge such businesses, and all of these are positive.
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The company is confident it can meet its internal targets for return on investment from avocis, which has already provided a couple of potential contract wins. The shares, though, trade on almost 18 times earnings. Though the long term story is intact, it looks like time to take some profits.
Revenue £2.3bn
Dividend 10.5p
3% Organic revenue growth
MY ADVICE Take profits
WHY Though the potential growth from new contract wins will feed through next year, shares look very highly rated for nowt
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Has the long run on Renishaw shares come to an end? The Gloucester-based producer of high tech measuring equipment — a must-have for companies such as Apple and Samsung as they put together new products — has come up from £8 at the end of 2011 and added another 136p to £21.00 on figures for a year which was exceptionally successful as the above customers ramped up production.
The shares, though, have been a dull market since the first quarter. Pre-tax profits for the year to the end of June more than doubled to £144.2 million, but the company is guiding to a figure of £85-105 million in the current year. That inflated number for last year reflects what the company coyly describes as “further large orders from Far East customers”. Renishaw never identifies these by name.
So revenues from the Far East were ahead by 91 per cent, an increase that is clearly unsustainable.
The smaller healthcare business, which provides spectroscopy products, was hit in the first half by a cancelling of research orders from places such as Japan and the strength of sterling, though this recovered in the second half and revenues for the year as a whole here were flat. That share price fall has them selling on a more reasonable 18.5 times this year’s earnings.
The relationship with those two big consumer electronics customers is not going away, while sales of metering products elsewhere were ahead by 11 per cent as Renishaw went further into aerospace and automotive markets. The current price looks like a good entry point.
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Revenue £495m
Dividends 46.5p
MY ADVICE Buy
WHY Shares have come back but fundamentals still there
Jupiter Fund Management presents the investor with a bit of a quandary. The shares have run up by more than a pound since I tipped them in January, and, up 11p at 452½p on an earnings multiple of 16, they begin to look expensive for the sector. On the other hand, the fund manager’s low-cost model, which allows a policy of paying out 90 per cent of earnings in dividends, means the yield of 5.7 per cent is one of the best on the market.
Halfway figures showed no cause for concern — in fact, profits were swollen by a one-off £12 million boost to performance fees from one particular mandate. Not much of Jupiter’s assets are performance-related, and this will not recur.
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Assets under management went ahead well enough, up from £31.9 billion at the start of the year to £34.3 billion, although soggy markets in the second quarter meant some slippage then. The fund manager is continuing to add to its global distribution platform, but as I said this requires no great investment.
So, given no market cataclysm, that dividend flow should continue. You might take profits, and I am not sure I would be buying at this level, but that yield is attractive enough.
AUM £34.3bn
PBT £84m
MY ADVICE Hold for income
WHY Earnings multiple is high but yield attractive
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Any finally . . .
National Express is slowly building a rail business in Germany, and such contracts are inevitably smaller and therefore less traumatic than the average UK franchise should they be lost. The company has now said that these more reliable earnings can be included when it considers dividend cover, which is a positive long term. A note from Shore Capital, however, urges investors not to get carried away just yet. Rail is expected to contribute less than £10 million to operating profits of £200 million for this year.
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