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Broker snap: Upside potential limited at Xchanging
Thu, 09 Feb, 2012
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Broker snap: Upside potential limited at Xchanging
Fri, 27 Aug 2010, 12:18:00
Business process outsourcing (BPO) specialist
Xchanging
held a conference call this week to clarify some accounting issues that were concerning the market, but questions remain on other fronts, Panmure Gordon reckons. "Questions remain, particularly on its largest customer BAE as well as its ability to grow in the short term, with the acquisition of Cambridge more problematic than first anticipated," the broker said, explaining its decision to cut 2010 and 2011 earnings estimates by around 8% to 9%. That puts Panmure Gordon's estimates below the company's own guidance range, but the broker notes the guidance "has sometimes been poor in the past." Panmure Gordon is sticking with its "hold" recommendation, though it concedes the shares look cheap "on current spot multiples". The issue for Panmure Gordon is whether the company can deliver value in an environment where "growth looks increasingly difficult to come by and with creditability still low." The conference call threw some light on how problematic the Cambridge Solutions acquisition has been. "Due to aggressive profit recognition from the previous management team, this means some of its contracts will now be run off at nil margin, with onerous lease costs also adversely impacting cash flow for up to three years," Panmure Gordon explained. Cash restructuring costs will wipe out most of the free cash flow this year, "which is very disappointing and almost unheard of for a BPO business," Panmure Gordon added. With no detail forthcoming on the outlook for the BAE contract - believed to account for up to 20% of revenues - the broker does not feel "there is enough upside potential [to] justify taking a large position."
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