Jefferies & Co. upgraded its rating on shares of Logica Plc (London: LOG) to "hold" from "underperform", while lowering its price target to 90 pence from 105 pence.
"The market's strong reaction post first half of 2011 results, which fell short on profits, means that Logica now trades at a discount to peers on updated estimates. We feel that this rating now more fairly reflects Logica's strategic positioning and the weaker margin outlook. In addition we expect Logica to find some support given its relatively secure 5.6 percent prospective dividend yield," said Graeme Clark, an analyst at Jefferies.
Logica's first half adjusted operating profit of 113 million pounds sterling was below both Jefferies (117 million pounds sterling) and consensus (121 million pounds sterling) expectations.
Clark said the results fell short, not only because of the expected weakness in the Benelux, but also due to restructuring of its UK business and unexpected costs in Sweden associated to a transition of Infrastructure Management contracts to delivery from Logica's offshore centres.
While restructuring and other actions in the UK and Sweden should lead to a much improved second half of 2011 performance, Clark remains concerned by management's desire to invest for growth in the Benelux rather than more aggressively restructuring headcount.
Rebased guidance, despite stronger top-line growth, leads Clark to cut fiscal 2011 EPS by 3 percent and fiscal 2012 by 4 percent. Clark lowered 2011 EPS estimate to 12.40 pence from 12.80 pence, 2012 estimate to 13.40 pence from 13.90 pence and 2013 estimate to 14.70 pence from 15.10 pence.
Clark, however, raised 2011 revenue estimate to 3.99 billion pounds sterling from 3.93 billion pounds sterling, 2012 estimate to 4.16 billion pounds sterling from 4.099 billion pounds sterling and 2013 estimate to 4.33 billion pounds sterling from 4.26 billion pounds sterling.
Logica accelerated its offshore hiring in the first half, but remains a long way behind leading sector players, such as Capgemini with 37 percent offshore penetration.
Clark remains concerned that an accelerated push offshore, in order to be more competitive, could lead to further issues as seen in Sweden and the need for additional restructuring of the onshore headcount.
Clark said fiscal 2011 revenue guidance was increased to around 5 percent organic growth, in light of strong momentum in France, Northern & Central Europe and Sweden; and some stability in the UK and even in the Benelux.
However with management pursuing an investment for growth strategy rather than restructuring its operations in the Benelux, margin guidance was reduced.
Logica stock rose 0.11 percent to 88.65 pence on the London Stock Exchange at 8:11 am British Standard Time.