We round up the Sunday newspaper share tips. This week, Midas looks at the recovery potential of Capita, the Times assesses Smiths, and the Telegraph considers BT’s future prospects.
MAIL ON SUNDAY
Outsourcing group Capita has had a hard time in recent years, with a raft of profit warnings, a growing pensions deficit and a Labour leader threatening to nationalise many of the services it provides.
Its woes were compounded at the start of the year when it issued a profit warning just two weeks after the collapse of fellow contractor Carillion.
Shares plunged to a 15-year low, wiping £1 billion off the value of the company overnight and it looked as though the troubled business could be the FTSE 250’s next casualty.
But, three months on, Capita is still hanging in there. Shares closed on Friday 17 per cent higher than at the start of the week as cautious investors wondered whether the turnaround was finally starting to take hold.
If you can get past the headline figures – a net loss of £513 million in 2017 and a £400 million pension deficit, for example – things may not be as grim as they appear.
Underlying operating profits, for example, soared 34 per cent in the year to £447 million, with several divisions making good progress.
The business expects pre-tax profits of between £270 million and £300 million for this year, though that doesn’t take into account the costs of restructuring and turning the business around.
This week non-executive director Andrew Williams splashed out £53,750 on 30,000 shares while chief executive Jon Lewis snapped up 138,500 for £248,120.
Veteran investor Neil Woodford is remaining steadfast, too, though it is understood that his fund took a £40 million hit when Capita suspended its dividend in January.
The star fund manager is Capita’s second-largest shareholder, with a 10 per cent stake in the business.
Midas verdict: Investors bruised by the heavy falls in the share price may want to hold on to their stock in the hope of reducing their losses.
Newcomers should hold fire for now. Turnarounds are rarely quick and not always successful. While Capita’s management team has identified a plan of action, it remains to be seen whether it can pull it off.
THE SUNDAY TELEGRAPH
There is good money to be made in telecoms. That, at least, was the conclusion a Goldman Sachs consortium came to last week when it agreed the £538m takeover of CityFibre, a firm that aims to build its own fibre broadband network in selected towns and cities to compete with BT.
And CityFibre is not alone. A partnership of M&G Prudential and TalkTalk is eyeing the connection of 3m homes and businesses. Both ventures are responding to Ofcom boss Sharon White’s call for an additional network – on top of BT and Virgin Media – offering fibre all the way to the premises, instead of stopping at the street cabinet, to lay the groundwork for the UK’s high-speed digital economy.
BT is doing its bit too, with Openreach, its local access arm, promising to reach 3m homes and businesses by the end of 2020, with more to follow as the business case proves itself. White does not think it is enough. The former phones monopoly has been fighting a losing battle with the regulator for a while.
Not only did Ofcom force a greater separation of Openreach from the mother ship and slash basic line rental charges, but to encourage higher investment it will make BT open up more of its network to competitors and regulate the price at which it wholesales 40 megabits per second fibre.
For a long time, top-line growth was hard to come by for BT but fibre has been a boon over the last few years, with take-up consistently exceeding expectations.
Newly arrived chairman Jan du Plessis, who has spent £500,000 on BT shares, has a track record of delivering shareholder value. His chief executive Gavin Patterson is under pressure to simplify the business, something that is likely to be a key theme of full-year results on May 10.
Patterson was severely weakened by a costly accounting scandal in Italy. The upshot of that is the fabulously named divisional chief Bas Burger will mince its global services division into a smaller, more palatable, morsel.
Last month, BT agreed with the Communications Workers Union to close its defined benefit pension scheme, lessening fears that its gaping funding gap would widen further, but signalling the pace of reform is accelerating. Even though the fund was closed to new members 17 years ago, its deficit is estimated at £14bn. The result of a review, due this summer, should reassure.
Elsewhere, a reciprocal wholesale deal with Sky to show each other’s sports channels appeared to take the sting out of the Premier League TV rights auction in February. From next year, BT will pay £885m per season to show top-flight football, compared to £960m today, albeit for fewer fixtures.
Curbing spending comes as a relief for investors worried that its TV arm, which has been shedding customers, is an expensive folly.
Long-suffering shareholders should not expect a share price recovery as high-speed as the fibre broadband the UK needs, but new investors should consider now a good time to log on. Buy
THE SUNDAY TIMES
Conglomerates are once again an endangered species. General Electric faces a break-up under new boss John Flannery; GKN has just succumbed to a takeover by Melrose that will ultimately see the 259-year-old business dismembered.
Smiths Group is an outlier. While everyone else is busy breaking up, the FTSE 100 engineer is still trying to grow its collection of disparate businesses.
Its chief executive, Andy Reynolds Smith, 51, was hired from GKN in 2015 by chairman Sir George Buckley with a remit to grow Smiths — a reversal of his predecessor Philip Bowman’s strategy.
The engineer, who got fed-up waiting for the top job at GKN to become vacant, has put his stamp on Smiths. Its shares surged on this new-found optimism, and Reynolds Smith scythed through senior management with gusto. Pensions have been de-risked, insuring big chunks of its liabilities through bulk annuity deals. The idea of breaking up Smiths was put firmly to bed.
Lately, though, things have stalled. Almost three years into Reynolds Smith’s tenure, and investors are growing impatient.
Reynolds Smith has pinned his hopes on the full-year results, promising a strong surge in revenues.
This is not a done deal. First-half revenues fell 1%, and were 4% lower when currency impacts were included. Medical sales, which were flat in the first half, are dependent on the success of new product launches. Sales of scanners and other detection equipment, which tumbled 11% in the first half, hinge on a surge in orders later this year.
Reynolds Smith may have killed off the idea of a break-up for now, but he needs to start delivering on his promises. Until then, hold.
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