US Edition Capita Group
696p -16.5
Questor says BUY
Questor argued that there would be few clear winners from the recession, but outsourcing group Capita was likely to be one of them. This is proving to be the case.
The shares were recommended at 657½p on February 27 and they are now about 7pc ahead of their recommendation price. The shares moved lower after the results were announced, but this appears to be investors selling on the fact after a solid first-quarter update.
The group is the country's largest back-office outsourcing company and it offers services such as printing and managing wage slips. It performs functions for pension and financial services groups as well as local authorities and central government. It even manages the ever-popular TV licence fee.
Capita said pre-tax profits rose 9pc to £134.8m in the six-month period to June 30, on revenues that rose 11pc to £1.3bn. Pre-tax profits were actually up 18pc once one-off items were excluded. The interim dividend was hiked by 17pc to 5.6p, which is a confident and reassuring move by management. However, it must be noted that the shares are only yielding 2.4pc, which isn't exactly earth-shattering.
Questor believes that cost-cutting and efficiency drives in major public and private organisations is an opportunity for Capita to grab new business. This is proving to be the case.
The rate of new business wins was greater in the first half of the current year compared with the first half of last year. The value of new contract wins in the period rose 30pc on a year-on-year basis to £814m.
The group's bid pipeline remains strong; confounding some sceptics who believed the amount of new work would dry up. The pipeline stood at £3bn at the end of the period, comparable with the £3.1bn figure at the mid-point last year. Questor remains unfazed by market worries of a slowdown in new business wins, believing Capita has a sound long-term business model and a good management team.
Margins were another bright spot, with operating margins up three percentage points to 12.2pc.
Analysts also expect to see long-term earnings per share growth of around 10pc a year.
The shares are trading on a December 2009 earnings multiple of 18, which does seem high, but the dividend is well covered and the company now looks likely to easily meet full-year forecasts. Shares in Capita remain a buy.
Compass
326.25p -26.50
Questor says BUY
Catering group Compass issued an update yesterday that was entirely in line with expectations, but the shares edged lower on concerns about easing organic sales growth. This slowdown is hardly surprising and the stance on the shares, which are up 8pc since their recommendation in November, remains buy.
The company said its cost-saving programme had been accelerated and new business wins were at a similar level to the first half of last year. The importance of this cannot be overstated. Not surprisingly, catering at events and for business functions slowed, but its operations in education and healthcare continue to make good progress.
In the first nine months of the year, revenue growth on a constant-currency basis was 1.8pc. Currency movements also added about £105m to operating profit in the nine months to June 30.
Organic revenue growth fell 4.8pc in the UK and Ireland and 0.6pc in continental Europe, but rose 2.6pc in North America and 4.2pc in the rest of the world.
For the full-year, the group sees revenue growth on a constant-currency basis to be to be about 1pc, with organic revenue growth expected to be broadly flat.
The shares are trading on a September 2009 earnings multiple of 11.7, falling to 10.9 next year. This is still a discount to its nearest listed peer, French group Sodexo, which is trading on a August 2009 earnings multiple of 14.4 times, falling to 13.3 next year – which appears unwarranted.
The shares are also yielding 4pc this year, which is more than two times covered by earnings, so it looks pretty secure.
The stance on the shares remains buy.
Scottish & Southern Energy
£11.37 +0.3
Questor says BUY
Questor advised income-seekers to buy shares in Scottish & Southern on May 24 and the shares are now 4pc lower than their initial recommendation price. However, the very impressive 6.3pc dividend looks secure.
Indeed, the group said that it remains on course to deliver sustained real dividend growth in the years ahead. Specifically, SSE said it would deliver at least 4pc annual real growth in the current year. Indeed, in its last results presentation in May, the group said: "SSE's first responsibility to shareholders is to deliver sustained real growth in the dividend."
New investors can even buy the shares now to grab the final dividend payment from last year. The final 46.2p payout will be made on September 25 and the shares go ex-dividend on August 19. This gives an almost immediate yield of 4pc. The shares are trading on a March 2010 earnings multiple of 10.2 and the shares are a buy for investors focusing on income.