Acal on the economy

The changes at Acal are most evident in the uplift in margins which helped increase underlying operating profits by 9 per cent to £8.1m. Indeed, aided by the purchase of four specialist businesses, operating margins have shot up to 3.1 per cent over the past three years, including a 30 basis point rise over the past 12 months. The target is to increase margins to 5 per cent in the 'medium term' by raising higher-margin sales and cutting costs.

Management's confidence in its ability to push profitability further ahead is especially welcome as revenue is set to drop further. The move away from lower-margin work knocked £5m off turnover last year and is expected to chop off another £11m this financial year. But the economic turmoil in Europe is the real concern. Some comfort can be taken from the fact that 90 per cent of the group's clients are in stronger European countries. Management has also started to look for acquisitions to take Acal into new faster-growing developed markets such as North America and Asia.

Broker Peel Hunt thinks margin gains will help offset economic woes and is maintaining underlying EPS estimates of 21p (19.9p in 2012), despite lowering revenue forecasts by about 5 per cent.