Five years ago, faced with growing competition from the likes of IBM and new Indian providers such as Infosys, this UK-based IT services provider was forced to make a tough choice. It couldn’t remain a relatively small player or it wouldn’t survive, so it had to either bulk up to generate economies of scale, or sell-out. It chose the former, setting out on an aggressive acquisition spree. But with the company now set to become a takeover target itself, a recent slump is looks like a great buying opportunity.
Tip of the week: LogicaCMG (LOG), tipped as a BUY by Citibank
In 2002, Logica merged with Dutch firm CMG in a £510m deal, and in the past two and a half years has spent more than £1.5bn buying firms across Europe. LogicaCMG is now Europe’s seventh-largest IT services provider and 19th in the world by turnover, with around 39,000 staff in 41 countries.
Although still under-represented in Germany and America, Logica is now big enough to compete for many of the largest IT services contracts in western Europe. But pressure is mounting after a profits warning last week saw analysts slash 2007 profit forecasts, while shares dived 9%. Despite strong performances in France, Holland and Scandinavia, Logica’s UK revenue – around 30% of turnover – fell more than 4% in the first quarter. UK profit margins are set to slip to 6% from 9% last year due to the end of a large transport project, a slow start to others in energy and utilities, and the need to take a one-off hit of up to £15m due to soaring costs on a large contract.
But these problems seem short term and are being resolved. A new UK head joined in January, while chief executive Martin Read resigned on Sunday. Sales for 2007 and earnings per share are expected to be £3.1bn and 11.3p respectively, rising to £3.2bn and 13.2p in 2008. The stock, at 167.75p, trades on undemanding p/e ratios of 14.8 and 12.6 for this year and next.
So what are the risks? Investing in IT services is notoriously cyclical. Activities are operationally geared with high staff costs. Also, outsourcing contracts can be very large and carry substantial execution risks. Sentiment towards technology groups is also highly volatile.
But with a solid position in Europe, an attractive valuation and a bite-size market capitalisation of £2.6bn, Logica could become a takeover target; especially as its Indian counterparts wish to expand aggressively in the region. Indeed, following Read’s resignation, there is every chance the uncertainty could trigger a bid by any number of deep-pocketed predators before a successor is appointed.
Recommendation: sell-off represents a BUYING OPPORTUNITY at 167.75p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments