The Investment Column: Capita is still worth holding, despite the soaring price
Dairy Crest; Dignity
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Your support makes all the difference.Our view: Hold
Share price: 518.75p (+44p)
Capita shares were propelled to an all-time high yesterday as the business process outsourcing company posted record interim results. Profits before tax rose 24 per cent to £92m on the back of higher margins and booming revenues. There was also news that the group had secured £806m worth of new business since the start of 2006. In the same period last year it won only £240m.
Given this performance it was no surprise to see Capita shares feature as the top gainer in the FTSE 100, up a whopping 9 per cent. In simple terms the company does tedious office and admin jobs for public and private sector organisations. For example, it runs the London congestion charge, administers television licences and does back office work for the Swiss insurer Zurich Life in the UK.
The profit margin improvement Capita delivered yesterday was thanks to its growing reliance on getting work done in India. This reduces the costs it faces in implementing projects. So far it has two business centres in the country, but by 2009 it hopes 10 per cent of its headcount will be based there.
Although Capita shares trade at 23 times forward earnings, they are worth holding. At present the UK's outsourcing market is worth £4.4bn per year. Analysts estimate it could end up being worth 20 times this figure. Even if they are half right, Capita should continue to enjoy stellar growth for a long time to come.
Dairy Crest
Our view: Hold
Share price: 505p (+5.75p)
Dairy Crest alerted the City yesterday that Drummond Hall would be standing down as chief executive of the cheese and milk maker in December to spend more time with his young family. In a 15-year career as a main board director of Dairy Crest, Mr Drummond has spent the past four-and-a-half at its helm. He is to be replaced by Mark Allen, currently managing director of the group's dairies division.
The company also issued a short trading statement yesterday in which it complained that market conditions remain tough. Nevertheless, it assured investors that it would meet its full year earnings forecasts. After a difficult few years, stability now seems to be returning to the mainstream milk market in the UK.
Importantly, Diary Crest has the advantage over many peers of having an extensive portfolio of branded dairy products. It believes that having strong brands is key. At present 56 per cent of its profits comes from branded items. These include Cathedral City mature cheddar cheese, which is a bigger brand than Heinz tomato ketchup in Britain, Utterly Butterly spread and Country Life butter.
Dairy Crest is even trying to brand milk. Its St Ivel Advance contains Omega-3, a fatty acid key for a balanced diet that the company says average Britons fail to get enough of. Yesterday, the group launched a Country Life brand of organic milk in Tesco stores.
The focus on developing this kind of value added portfolio of products will continue for a long time to come and should drive earnings growth. Dairy Crest shares trade at 11.7 times forward earnings. A dividend yield of 4.5 per cent makes them a hold.
Dignity
Our view: Buy
Share price: 519.5p (+9.5p)
Death and taxes are the only sure things in this life. It is no surprise therefore to see Dignity, Britain's only listed funeral services company, doing rather well. The group is due to hold an extraordinary meeting next week to approve the return of £80m to its shareholders. Investors will receive 100p in cash for every share they held on 1 August this year.
After the cash return, Dignity plans to consolidate its stock, with shareholders receiving 7 new shares for every 9 they currently hold. The consolidation has been designed to smooth out the impact of the cash return on the share price.
This whole exercise underlines just how well the Dignity business model is performing. Its first-quarter trading beat City forecasts and analysts expect its September interim results to show continued progress despite a slowing death rate. Profits at the company stood at £23m in 2004 and are tipped to hit £26m this year and £28m in 2007. Given its cash-generative qualities, Dignity should be in a position to repeat the upcoming cash return in three years' time.
Unsurprisingly, its shares have more than doubled since their April 2004 float. But they have further to go, especially if the company manages to conclude a series of partnership agreements with local authorities. Under these deals it might take over the operation and in some cases build new crematoria for the authorities. Should these types of agreements take off, they could prove to be a major money-spinner for Dignity.
This column tipped the shares in the wake of their float at 230p. Now, at 519.5p, and valued at 16 times 2007 forecast earnings, they are still worth buying.
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