Although perhaps best known for its sponsorship of the Oxford-Cambridge Boat Race, Xchanging is also pretty adept at helping is clients to sail through treacherous waters. It is a pure-play business process outsourcer, enabling corporations and governments alike to get more from their services at a lower cost. Outsourcing is nothing new, but even so, it is still a growth industry expanding at 5%-10% a year.
And Xchanging is good at it. The group has secured many blue-chip companies, such as Allianz, Deutsche Bank and Eon, under long-term agreements. Its activities include invoice processing, payroll and procuring office supplies. The top-ten clients equate to around half of its business, and first-half revenues were split as follows: 54% from Britain, 23% from Europe, 17% from the Americas and 6% from Asia.
The sales pipeline is also healthy, and at last Monday's update, chief executive David Andrews said that trading was on track, with the firm bagging a landmark five-year contract with Gatwick Airport to provide network management services.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So why has the share price fallen? Sentiment is weak, partly because growth rates for 2010 have slipped by three percentage points to 4%-7%, as customers remain cautious and delay signing new deals. But perhaps the most significant issue has been the City's concern over the way Xchanging has accounted for its £83m purchase of India's Cambridge Solutions back in 2008. Sure, allegedly shifting profits from below to above the line is not quite playing with a straight bat. Yet in the grand scale of things, it's chicken-feed. This involved less than 1% of revenues, and there is no cash impact.
Gamble of the week: Xchanging plc (LSE: XCH)
Analysts have pencilled in 2010 turnover and underlying earnings per share of £784m and 16.1p respectively, rising to £838m and 17.6p in 2011. That puts the stock on p/e ratios of 8.2 and 7.4 for the next two years. It also has £3.5m of net cash. I'd value the firm on an eight-times EBITA multiple, which, after adjusting for the £36.7m pension deficit, gives an intrinsic worth of 215p a share.
Possible banana skins include the fact that managing long-term contracts can be tortuous although the associated revenue visibility certainly compensates for this. BAE Systems, which is one of Xchanging's largest accounts, is cutting costs, so there may be some fallout from this. And competition is hotting up, although the likes of Capita and Serco, who are also having problems with order flow, trade at much higher premiums. In short, with cash-strapped clients increasingly turning to outsourcers to help deliver better and cheaper services, Xchanging looks a sound choice.
Recommendation: SPECULATIVE BUY at 126p (market cap £302m)
-
The top stocks in the FTSE 100After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
