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Xchanging procures a recovery

RESULTS: Xchanging's revamped strategy depressed its first-half performance, but may pay off in the long run.
August 1, 2014

In a bid to stand out from the crowd of business process outsourcers, Xchanging (XCH) has shifted its focus towards offering more complex, tech-enabled software such as Xuber for insurers and AR for financial services companies. The transition has been far from smooth - turnover slumped by a fifth in the first half. But it appears to be nearing completion, as Xchanging’s like for-like operating profit rose by nearly a third to £20m.

IC TIP: Buy at 178p

The top-line decline reflects a big reduction in its contract with the London Metal Exchange from May onwards, together with the disposal of the human resources side of its procurement division. The group also divested its Xchanging Transaction bank last August, which explains the 29 per cent net sales decline in its main business processing services segment to £142m. However, it did win a three-year claims processing contract with the Lloyd’s market, as well as early contracts for its new Binder360 product.

Xchanging hasn’t hesitated to use its sizeable cash pile, acquiring Agencyport Europe and (post the period-end) Total Objects in a bid to bolster its insurance software business. It expects those deals to open up cross-selling opportunities and provide entry into new markets such as risk exposure modelling and health insurance.

Broker Liberum Capital expects cash profits of £74.3m, giving EPS of 10.5p, rising to £90.7m and 13.2p in 2015.

XCHANGING (XCH)
ORD PRICE:178pMARKET VALUE:£434m
TOUCH:177-178p12-MONTH HIGH:190pLOW: 121p
DIVIDEND YIELD:1.4%PE RATIO:8
NET ASSET VALUE:90p*NET CASH:£108m

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201334721.23.8nil
201428222.24.5nil
% change-19+5+21-

*Includes intangible assets of £234m, or 96p a share