Questor share tip: Buy Logica - it could reap benefits of EU outsourcing

Message from fivefilters.org: If you can, please donate to the full-text RSS service so we can continue developing it.



Published: 7:00AM GMT 25 Feb 2010





Logica

Logica

116.9p -5.6p

Questor says BUY

Andy Green, the IT services group's chief executive, is gunning for a Labour
victory. A Conservative government, or worse a hung parliament, is likely to
lead to a purge in public sector spending, which now accounts for 63pc of
Logica's UK revenue.

As he announced the Anglo-Dutch group's full-year results yesterday, Mr Green
shocked some analysts by warning that sales will dip in the first-half of
2010 and are unlikely to increase over the full-year due to reduced public
spending across Europe.

"We do not see the economic climate strengthening, and until we do we
have to be cautious," he said. "Whatever happens in [the election]
public sector spending will be slower this year. It is likely that a hung
parliament will put back decision-making and prolong the hiatus in spending."

Despite Mr Green's assurances that the company had taken accounted of the
effects of the election in its 2010 forecasts, the warning knocked almost
5pc off Logica's shares.

If the next government does cut public spending, Logica will be glad its
exposure is not as great as rivals IBM, Accenture and HP, which are likely
to suffer the brunt of any reductions.

George O'Conor, analyst at Panmure Gordon, said 2010 will be a "an uppy
and downy year", but believes Logica's public sector strength and
experience puts it in good stead to reap the benefits when European
governments latch on to the benefits of outsourcing. "Logica is head
and shoulders above its European rivals. European governments will seek out
Logica," he said.

Full-year pre-tax profit came in at £42.6m compared to £43.8m in 2008. Sales
dipped by a less-than-expected 3pc to £3.7bn,

Logica's IT consulting sales fell 10pc, with the financial services sector
dropping 20pc as battered banks cut back on system upgrades. The company's
Benelux sales dropped 19pc, as the region's finance-focused IT companies are
also reeling from the fall-out of the financial crisis.

Management pleased investors by increasing the dividend – payable May 6 – by
10pc to 3.3p. "As the economy recovers, we would expect smooth
progressive increases in our dividend towards a higher payout ratio,"
the company added. "This would allow shareholders to benefit directly
from the growth resulting from our recent investment in the business, while
continuing to provide sufficient funds to invest in future growth."

The stock, which is trading on 10 times 2010 forecast earnings – a 30pc
discount to its peers – looks cheap. The dividend yield for 2009 is 2.9pc
and forecast to be 2.6pc for 2010.

Although the shares have dipped since Questor last tipped the stock at 121.7p
in November, we are still confident Logica is well positioned for
substantial growth over the long-term. Buy.

Five Filters featured article: Chilcot Inquiry. Available tools: PDF Newspaper, Full Text RSS, Term Extraction.