Solid start to the year
Shares in outsourcing group Capita rose sharply today, after it issued a trading update covering progress from the beginning of the year. The group made a solid start to 2016, having secured £458m aggregate major contracts, acquired four companies, and disposed of two businesses that were held for sale over the year end.
The company says it expects organic sales to grow by 4% this year, despite having secured less than half the number of contracts it had this time last year, and says it’s on track to meet consensus expectations for 2016. The bid pipeline remains active, particularly in defence, local government, science and health in the public sector, and telecoms and financial services in the private sector. Major contract wins include Volkswagen and Debenhams, as well as five new district councils in the UK.
Capita shares have fallen 13% in the last six months alone, and are now trading on 14 times forecast earnings for this year, falling to 13 for the year ending December 2017. Dividends payouts are reasonable, with prospective yields of 3.4% and 3.6% forecast for this year and next. The shares look undervalued to me, given the company’s steady growth prospects and well-covered dividends. Attractions remain for both growth and income investors.
The UK’s largest bank HSBC last week released its earnings report for the three months to March 2016. The FTSE 100 lender reported a 14% fall in pre-tax profits to $6.11bn, compared with the same period in 2015, with adjusted revenue down 4% to $13.91bn, blamed on challenging market conditions.
The lower revenue was primarily in the global banking and markets’ FX, equities and credit segments, as well as the life insurance unit of Retail Banking and Wealth Management, partly offset by continued momentum in commercial banking. Loan impairment charges, after currency adjustments, jumped from $469m to $1.16bn, with additional charges related to the oil & gas, and metals & mining sectors.
Despite the disappointing figures, the outlook isn’t as nasty as you might expect, with our friends in the City already expecting an 8% decline in earnings for the full year to December, followed by a 7% rebound next year. I think the bad news is already priced-in, with the shares have fallen 32% during the last twelve months and are now trading on just ten times forecast earnings for both 2017 and 2018. At these low levels the dividends look irresistible with yields of around 8% forecast for the next two years.
Both HSBC and Capita look to be trading on very attractive valuations at present after suffering big declines in recent months. I think HSBC could reap higher rewards, but is still only suitable for investors willing to accept higher levels of risk by taking up a contrarian position in the out-of-favour banking sector. Otherwise Capita would be the safer option, albeit with lower potential rewards. Take your pick!
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.