Says cautious, long-term blue chip investor Robert Sutherland Smith of UK350.com.

Although Logica (LOG) – the supplier of computer services to companies – has handsomely outperformed the FTSE 100 Index over a year with a 64% rise in contrast to the 23% increase in the FTSE Index, it was from a very low base and the company still significantly lags the index on a five year view. Whilst the stock market has risen 14.4% from its level of five years ago Logica shares are down almost 30% on their market value five years ago; a relative under performance 44.4%. Arguably, they have some ground to recover as business’s start to spend again on the kind of corporate services provided by Logica.

On the basis that we are seeing longer term sustainable economic recovery in the UK and Europe, I think that Logica equity still offers the prospect of capital gains as company earnings get better and ratings of the company’s shares improve with unfolding economic events over the next year or so. The attractions of Logica equity include: the fact that it performed better in 2008 than many expected; that it has a large European business as the results of a lot of corporate acquisitions in recent years; that it offers good value in terms of sales revenue, book to share price value and the size of the enterprise value of the business (that is to say the whole business financed by equity and borrowings) in relation to the market’s current valuation of its equity – £1.97 billion last seen.


So first, a little recent history. The company’s normal year end is 31 December. It performed reassuringly in the twelve months to 31 December 2008, showing an positive response to what as happening that year and what was likely to happen the following year of 2009. Sales revenue in 2008 rose 16.7% to £3,588 million and there was a 22%decline in profit from operations to £86 million. Net income fell on a comparable basis by 77% to £39 million. Cash from operations were dramatically improved by nearly 95% to just under £300 million. So Logica entered 2009 with cash.


In the following six months of the year 2009, revenue rose a modest 3% to £1,870 million pounds. Operating expenditure increased 4.3% and operating profit fell 31% to £39 million and net income by a third to £21 million. However, on a ‘normalized’ basis net income fell only 2.25% to an estimated £60 million. In the first half of 2009 operating cash fell 80% to £16.4 million. Cash in the balance sheet to 30 June 2009, was £61 million. There were total assets of £3,578 million of which £1,800 million were shareholder funds. In simple terms, the management could rely on the big increase in cash it obtained in 2008 whilst at the same time overseeing a 25% fall in current liabilities and a 20% fall in long term debt.


For those who think of the Logica a largely UK company, that is not the case. Logica earns most of its revenue and operational profits in France and the Nordic countries, The UK provides only one fifth of sales and 28% of operating profit. Although public sector work is significant, it is not dominant. It recently accounted for 32% of revenue. Against that, group outsourcing contract work was 36.6%. Put the other way, non government work was 68% of total turnover and of government account work, part will have been outsourcing contracts which are, on the face of things, likely to do better when the government needs to raise cash.

So here we have a Europe wide company that was prudently managed in 2008 for life in 2009. It is a large well established business that has considerable scope for recovery as business activity picks up in the next year or so. Its pre tax margin fell to 1.2% in 2009; less than half of what it was in 2007 at 2.7%. In the next three years to December 2011 the company has the capacity to keep on growing revenues and improving profit margins. From the 2008 level revenue is estimated to increase by £200 million. At the same time, pre tax margins are estimated rise to 6.0.% in contrast to the 1.2% of 2008. The reasons for that are in part cyclical and in part managerial. For the last seven years or so the company was managed to grow critical mass rather than generating maximum profits. A change in that policy to manage for greater profits was taken over a year ago but disguised by the fears of depression and recession in 2008 and 2009.

Basically, estimated earnings are 10.8p for the year just ended putting the shares on a price earning multiple of 11.3 times. Earnings are expected to rise by some 8% in to 11.7p this year putting the shares on a forward estimated price to earnings multiple of 10.4 which with a further forecast 10% increase in earnings in 2011 to 12.9p puts the valuation on only 9.5 times. The dividend yield for last year (results awaited) is estimated at a 3.4 times covered 2.6% rising to an estimated 2.8% for next year: that is the year to 30 December 2011. With balance sheet shareholder funds worth around 113p of the 122p share price Logica offers perceptible value. At 122p a BUY.

Key Data

EPIC: LOG
Market: Full
Spread: 121.9p – 122.1p (.16%)

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