BULL POINTS:
■ Cost savings coming through
■ Resilient UK business
BEAR POINTS:
■ Dull outlook for 2010
■ Profits margins under pressure
■ Consulting revenues on downward trend
■ Tough end markets
Full-year results for 2009 from Logica disappointed investors enough for the price of shares in the IT services group to shed 5 per cent. Perhaps it was because investors are becoming increasingly fed up with the Anglo-Dutch group dishing up disappointing news. This time around Logica reported like-for-like revenues falling 3 per cent, and normalised operating profits declining 6 per cent to £272m.
It may also have been because Logica painted a muted picture for 2010, warning that revenues for the year were unlikely to improve. Management cautioned that sales are expected to be marginally lower in the first half of 2010 compared to last year's £1.88bn. A mild recovery is, however, anticipated in the second half of the year, resulting in management guiding City analysts that revenue growth over the whole year would be flat.
Revenues in Logica's consulting and professional services division, which accounts for 63 per cent of the group total, have been under pressure for some time. Trading has been affected by lengthening sales cycles, and pricing pressures since last year. This is because consulting revenues are based on individual projects, which tend to be shorter than multi-year outsourcing deals and consequently are more susceptible to poor economic conditions. So, the 10 per cent contraction in revenues over the year was not too much of a surprise. To counter this trend, Logica has been developing its outsourcing business and that side has been growing steadily, with sales from the unit rising 9 per cent to £1.38bn in the year.
But this planned change in the business mix has its drawbacks. Typically, outsourcing deals carry lower profit margins. Costs savings should help though, with £130m of savings expected this year, and £145m a year due from 2011. The trouble is that pricing and volume pressures will offset any progress on cost savings this year. So, Logica has also guided for flat margins in 2010. And, Simon Strong, an analyst at broker KBC Peel Hunt, cautions that even this forecast is "optimistic".
LOGICA (LOG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 119p | MARKET VALUE: | £1.90bn | |
| TOUCH: | 119-120p | 12M HIGH / LOW: | 137p | 62p |
| DIVIDEND YIELD: | 2.9% | PE RATIO: | 18 | |
| NET ASSET VALUE: | 119p | NET DEBT: | 15% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 2.42 | 116.5 | 6.4 | 5.6 |
| 2007 | 3.07 | 84.1 | 5.4 | 5.8 |
| 2008 | 3.59 | 43.8 | 2.7 | 3.0 |
| 2009 | 3.70 | 42.6 | 2.5 | 3.3 |
| 2010* | 3.68 | 153.0 | 6.8 | 3.5 |
| % change | -1 | +292 | +172 | +6 |
NMS: 15,000 Matched bargain trading BETA: 0.9 *RBS forecasts | ||||
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In addition, a substantial portion of Logica's client base still operate in vulnerable sectors. About 27 per cent of its revenues stem from industry, distribution and transportation sectors, and income from these sectors has fallen 9 per cent since 2008. Financial services clients, which represent 15 per cent of sales, also remain reluctant to spend, with sales from the sector down 20 per cent.
Logica does, however, have a solid base of clients in the public sector, especially in the UK, where public-sector clients, such as The Crown Prosecution Service and Transport for London, account for 62 per cent of revenues. This has helped its UK operations remain robust. But there are well-publicised concerns that a new government in the spring - of whichever party - will have no choice but to cut public spending. In fact, Logica's chief executive, Andy Green, acknowledges that, whilst he is expecting growth in the UK business, he is not expecting a repeat of the rates recorded last year.
