Specialist outsourcing company Equiniti Group (LSE: EQN) defied the sector trend to register a solid improvement in revenues and earnings for 2016.
Overall, Equniti said revenue last year increased 3.7%, to £382m, in line with analysts’ expectations, driven by strong growth in investment services and software sales. EBITDA prior to exceptional items, a measure of underlying profitability, grew 7.2% to £92.4m, while earnings per share cam in at 10.2p, up from a loss of 92.8p in 2015.
Non-discretionary
Many in the outsourcing sector have seen businesses put off making big investment decisions following the Brexit vote of last June. However, since Equiniti provides services that are largely of a non-discretionary nature — ranging from running payroll to managing pension and share-save schemes — it has seen no let up in demand in recent months. Equiniti provides the critical infrastructure that underpins big businesses and government bodies — as a result, its business model is intrinsically more defensive than some of its peers.
Looking forward, Equiniti sees strong growth opportunities from increased cross-selling of services and favourable regulatory drivers, such as tighter anti-money laundering rules and stricter financial regulation. It is also planning to boost its bottom line by reducing costs and enhancing its scale — Equiniti expects to lift its margins by around 25 basis points a year, after an improvement of 80 basis points in 2016.
The company has an attractive progressive dividend policy, with management planning to increase its full-year dividend by 16.5%, on a pro forma basis, to 4.75p per share. This would still give its shares a relatively low yield of 2.5%, but given its dividend payout ratio is just 30% of underlying earnings there’s plenty of scope for further dividend increases down the line.
City analysts are bullish on Equiniti — out of the four recommendations, three are strong buys and one is a buy.
End of growth
Another company that reported its full-year results today is car dealership company Lookers (LSE: LOOK). The Manchester-based company said full-year profits increased for the eighth consecutive year thanks to steady growth in new car sales.
Revenue increased 18% in 2016 to £4.3 billion, while earnings per share was 4% higher, at 15.87p. However, the increase in revenue and profits failed to enthuse the markets. Shares in the company fell by more than 2% today, as management warned that industry forecasts point to a 5% reduction in new car sales this year.
New car sales have risen every year since 2009, but this trend appears to be coming to an end, as demand is set to cool amid a rise in import prices owing to the impact of the weak pound. A cooling market may not just be detrimental to the top line for car dealers, it could also hurt their already thin margins — Lookers’ underlying operating margin fell by 20 basis points to 2.2% last year.
The outlook for the sector has no doubt hurt sentiment towards Lookers’ shares. Lookers is currently trading at a forward P/E of 8.3, with shares yielding 2.8%. Although valuations seem cheap, I’m wary of buying in at the very top of the market.
