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Capita is a safe bet, despite what you may have heard

Independent, The (London), May 7, 2008 by Alistair Dawber

THE INVESTMENT COLUMN

Our view: Hold

Share price: 686p (+22p)

In an ideal world Capita would like to have kept the contract to run London's congestion charging scheme. In fact, IBM presented the capital with a better offer, and Capita, the FTSE 100 outsourcing group, will lose the deal from November next year, to much hullabaloo. But, as with much of what is written of Capita, says chief executive Paul Pinder, the episode got blown out of all proportion. The initial contract, at 60m, is worth about 2.5 per cent of the group's revenues.

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Investors may feel this is typical of the group; it attracts its fair share of flak but, for long-term buyers of the stock, Capita has been a winner: since floating in 1989, returns have increased 250-fold. In yesterday's trading statement, the group says the "prospects for the current year and thereafter remain strong".

Mr Pinder claims not to worry about valuations, and analysts are split on whether to recommend the stock. Those at Panmure Gordon say that while the group undoubtedly trades at a premium to its peers - "the shares do not look inexpensive on a price-earnings [ratio] of 20 times 2008 [earnings per share]" - the growth potential is huge with only 5 per cent of a possible 950bn market already outsourced.

The group says that winning contracts is a "lumpy" business, but argues that 2008 will be stellar, with a target of at least 1.5bn in new deals. Mr Pinder says that the company has already met analysts' revenue consensus for the whole 12 months. In the first four months of this year, the company's bid pipeline stood at 2.5bn, it said yesterday.

However, watchers at Seymour Pierce say that they see nothing more than treading water this year.

Capita attracts its fair share of bad headlines, but for investors looking to get out of something much dodgier, like the retail or financial services sectors, Capita is a good safe punt and the company is miles away from the credit crunch. The problem is there does not seem much room for the shares to grow. Hold.

United Drug

Our view: Buy

Share price: 305.5p (+7.5p)

United Drug, the UK and Irish pharmaceutical wholesale and marketing group, posted solid first-half results yesterday with a 15 per cent rise in pre-tax profits to 33.2m (26.1m). The problem is the pound. Sterling's weakness versus the Euro will, "continue to adversely impact on the translation of profits," says the group.

Even though the details are a bit thin, investors probably should not worry unduly. The company says that it sees strong growth in the second half of the year and others agree. Analysts at Davy Stockbrokers, the company's house broker, reckon the share price will rise to 440 cents this year, up from a close in Dublin of 390 cents yesterday. The watchers argue that with 13 per cent growth in earnings per share on the same period last year, the group's growth will more than mitigate the loss caused by sterling weakening.

Independent analysts at Goodbody say that United Drug trades at a premium to its rivals such as German group Celesio and Uniphar, and it is justified. "With peers looking at flat to negative growth compared to 2007, versus double digit earnings growth for United Drug, we believe it deserves to trade at a considerable premium." Goodbody says that the group could afford to splash out 37m on acquisitions without stretching the balance sheet, and argue shares will soar to 460 cents.

United Drug says the second half of the year will be good and that should include putting in a better performance in its medical and scientific division.

The company is a safe haven for investors who have seen the credit crunch eat up punts in other sectors. If the group can continue delivering growth at the rate the market is used to, buyers will be sitting pretty. Sterling continues to be a headache, but should not dent a handsome 2008. Buy.

Hipcricket

Our view: Hold for now

Share price: 257.5p (-2.5p)

Hipcricket is the sort of company that causes irritation. The company is engaged in the mobile marketing sector where owners of mobile phones are invited to reply to text messages, vote in a poll or receive an interactive message advertising a product. While most people are left wondering how on earth the company got their number, investors are hoping that mobile marketing will boom and lead to riches.

The Aim-listed business, which operates entirely in the US, teams up with broadcasters, which then use Hipcricket's technology for advertising. And the group is ambitious, its list of clients has risen from 177 last year to more than 300 today. The firm is also the first of its kind to launch a Hispanic service: a $1.2tr annual market place that advertisers are desperate to tap, says chief executive Ivan Braiker.

The company yesterday published its first full-year results since its Aim placing last November. Net profits were down sharply to $6.86m (3.48m), with the group saying the losses were down to reinvestment. It is hard to value the group as there are few competitors, but there is plenty of room for growth. Hold for now.

Capita is a safe bet, despite what you may have heard

Independent, The (London), May 7, 2008 by Alistair Dawber

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