LogicaCMG - the eurozone read-across

I thought you might be interested in George O'Connor, from Panmure Gordon, take on the Capgemini and Atos Origin results. George was making the comments in anticiptation of LogicaCMG's results due on 28th Feb 08.

The euro zone read-across
(Reproduced with permission but with the Forecast/Buy/Sell bits omitted)

Not in rude health but not a hospital case either is how we summarise the IT services market in the wake of resu lts from Atos today and Capgemini yesterday.

Atos Origin Group revenue up +8.5% year-on-year, organic growth at +4.3% with the operating margin at 4.6% of revenue, book to bill ratio of 1 06%, and net debt reduction to €338m. Atos has its first proposed dividend ever at €0.40 per share. Managed Operations was the best divisional performer an 8.7% operating margin, up from 8.5% last year. Guidance for 2008 is organic revenue growth of +4%.

Capgemini Capgemini grew revenue by 13% with notable performances in Nordics (up 22.3%), Southern Europe (up 14.1%) and France (up 8.6%). Outsourcing grew 7.8% but the margin was a slim 4.7%. Staff are 83,500 including 20k at offshore centres in India, Morocco, China. Poland and Latin America. Cap is not seeing any slowdown and sees margins growing. Revenue guidance for 2008 is a slim 2–5%.

Offshorers strengthen Watch the offshore pack, more than near-shore competitors we caution LogicaCMG. We note the industry analysts Pierre Audoin Consultants conclude that the top five Indian IT service companies (TCS, Infosys, Wipro, HCL and Satyam) could double their UK software and IT services market share by 2011 from under 3% to 7%. The analysts claim that in addition to offering low prices, offshore companies are winning on quality and depth of their offerings. Indian vendors experienced a 40% market share growth, with 2007 being the first time that offshorers matched the share of the big five European providers.

Market dynamics The latest TPI index showed a strong increase in total contract value and annualised contract value in Q4 after an otherwise sluggish 2007. Momentum in Q4 was partly driven by the highest level of total contract value awarded since Q1 2006. Annualised contract value for the global commercial outsourcing market in 2007 grew by c7%. For the first time EMEA overtook the Americas in outsourcing activity as EMEA accounted for over half of all global BPO. In addition the effect of buyers moving to larger composite suppliers and industry consolidation is becoming evident as there was a 12% decline the number of service providers winning at least one of the 487 contracts.

Valuation LogicaCMG shares are trading on a P/E of 1 0.2x, EV/Sales of 0.7, EV/EBITDA of 8.1. The dividend yield is an attractive 5.6%.

Diary date LogicaCMG finals due on 28 February