Weak public sector spending weighed on Logica, with disappointing first half results on Friday sending shares in the Anglo-Dutch IT services company down nearly 14 per cent.
The FTSE 250 company’s results for the six months to June showed a pre-tax profit decline of 13 per cent to £75m. The reduction in public sector revenue – which contributes more than a quarter of Logica’s turnover – was particularly severe in the Netherlands. Restructuring costs of £20m, mostly spent on redundancy payments to departing staff, also depressed profits.
Although the company predicted in February that its full-year operating margin would increase this year from last year’s 7.4 per cent, it was now not sure that this would happen, said Andy Green, chief executive.
Logica was not “prepared to call” the level of spending in Benelux countries in the second half, Mr Green said. “Government spending fell about 18 per cent last year and it fell again in the second half. They are really pushing down very hard with their deleveraging in the Netherlands in particular, so we’re not sure how that’s going to pan out in the short term.”
Logica had been hit hard by cuts to the Dutch defence budget, as the government pursued “probably the most severe programme going on anywhere in Europe”.
However, Logica’s management was “sticking to our guns”, Mr Green added, voicing confidence that public spending would recover in the long term. The company’s headcount had increased by 6 per cent since December to 41,700, and would grow further in the second half.
“These things are cyclical,” Mr Green said. “We have a very well balanced business across sectors and geographies. During the first phase of the global financial crisis in 2008-9 it was the public sector that kept the business going, and now the public sector is effectively in its recession.”
He said that private sector work was “keeping us going well”, with its contribution to group revenue growing 7 per cent in the first half to £2bn, helped by a major new contract with Shell. The biggest improvements in commercial sector business were in France, northern and central Europe, and the UK, where Logica also won a £157m contract with the Serious Organised Crime Agency.
Earnings per share declined 0.6p to 3.7p – suggesting that the full-year figure would be lower than expected at 12p, according to George O’Connor, an analyst at Panmure Gordon.
“Bears will focus on the profit miss … some of the positives were ignored,” he said, adding that the revenue growth was ahead of expectations. Although the performance in Benelux was a “key disappointment”, there were signs that European public spending was starting to “unclog” in areas to which Logica is exposed, Mr O’Connor said.
The shares fell 14 per cent to 88.55p.