Logica downgraded at Jefferies

Jefferies downgraded its rating on shares of Logica to "underperform" from "hold" and lowered its price target to 60 pence from 85 pence.

"Without a major change in strategy, we expect Logica's operating performance to lag that of peers. While the discount rating and 6 percent-plus yield provide some downside protection, we don't view Logica as a particu-larly attractive M&A target due to its lack of differentiation and the potential restructuring burden. We expect sector ratings to polarize, downgrading Logica to Underperform," said Graeme Clark, an analyst at Jefferies.

Clark said 2011 third quarter IT Services reports highlighted a polarization of performances with Logica trailing at the bottom of the group. Logica's weak momentum, in his view, relates to its strategic positioning and he main-tained that the business will continue to lag peers unless management makes the tough decision to reposition the business.

Logica's revenues were below expectations, with a material slowdown in growth (third quarter up 1.9 percent versus up 5.0 percent in the first half of 2011) leading to a cut in full-year revenue and margin guidance.

Clark said Logica was the only player within his Euro IT Services Universe to miss expectations and cut guidance and we maintain that this is due to his previously highlighted concerns regarding the strategic positioning of the business.

Clark said that while Logica has made some progress, increasing low cost headcount to 17 percent of the group, this remains way below industry leading levels (Capgemini 37.4 percent) and leaves Logica at a competitive disadvantage, pressuring the top-line and margins, with customers likely to be focused on cost reduction through fiscal 2012.

Clark concluded that a turnaround of the business is possible, but will take time and require the Board to reassess its focus on controlling the level of debt while driving shareholder returns through increased dividends. Short-term actions should include an optimization of headcount to protect margins.

"We remain concerned by Logica's almost wholly European focus (94 percent of group), its reticence to enter new high growth international markets and its lack of differentiated offerings targeting areas of premium growth," said Clark.

Logica stock is trading down 5.53 percent at 66.65 pence on the London Stock Exchange at 10:24 am GMT.