Thursday tips round-up: Capita, Tullow Oil

The fall in shares of outsourcer Capita is an opportunity. While the company did report that its bid pipeline had fallen to £4.1bn from £5.7bn in July, that should already have been known by markets – although the retirement of its finance director is arguably a negative. The likely reason for the drop in the stock is the aftershock of Serco´s 'kitchen-sinking' job on the previous day, which may have led traders to fear that there might be similar negative surprises lurking out there for peers. However, the firm continues to be on track for organic growth of at least 8% for 2014, the same as last year, and cash-flow remains strong. Underlying operating margins are also expected to remain at between 12.5% to 13.5% for the appreciable future. Indeed, the company won its its biggest single contract this year, with O2, which is worth £1.2bn over ten years. On 16 times this year’s earnings and offering a yield short of 3% “the fall looks overdone, suggesting a buying opportunity”, says The Times´s Tempus.

Oil exploration is a risky business, “hit and miss” at best. Hence, given oil is fast approaching the $80 per barrel mark, better to exploit existing reserves. That seems to have been the reasoning behind Tullow Oil´s strategic review. While the total capital spending budget was held at $2bn, the funds funelled into finding new reservoirs is to be cut back by $300m. That will allow further development of its Ten field in Ghana and, possibly, on further wells in Kenya. Interesting discoveries have already been made in the latter, as opposed to more expensive offshore drilling, which has had its share of failures. A few analysts quibble that the above decisions threaten the lifeblood of the business, but in reality they are eminently sensible. Even so, the drop in the oil price is likely to weigh on the stock despite the fact that they trade on an expected discount to market net asset value of about 625p. Tempus therefore recommends investors avoid the shares.