CAPITA still has the power to please investors. Yesterday’s interims revealed an express train of a business thundering down the rails with the prospect of miles of empty, dead straight track still ahead of it.

Sales, operating profits and the first-half dividend were lifted, respectively, by 23 per cent, 27 per cent and 29 per cent — not a bad pace for a locomotive now weighing in at £3 billion.

Capita is a past master at persuading government departments and private sector enterprises to outsource to it back- office functions of all sorts. The company gets a bad press. There have been fiascos such as the delays over checking teachers for criminal records at the Criminal Records Bureau or the fraud-hit plan for Individual Learning Accounts. But Capita wouldn’t keep winning contracts if it wasn’t, on the whole, delivering good service at less than the cost to its clients of doing things in-house. In the first seven months of this year it has clinched £806 million of major contracts, from taking over part of the BBC’s personnel department to running a call centre fielding technical queries for Dixons.

The pipeline of potential new business, where it has already been shortlisted as a candidate, stands at £2.8 billion. Capita has also proved itself adept at retaining contracts when they come up for renewal.

The beauty of the business model is that the contracts are long term, running for as long as 25 years and averaging eight years. Shareholders can peer years into the future with relative confidence. There are few other companies which at the halfway stage could boldly announce, “the board believes shareholders will be very pleased with the results for the year as a whole”.

Capita is big and has been able to apply scale economies to bring down costs for clients, while pocketing substantial profits for itself. In one niche business — handling life policy customers for the insurance industry — it reckons it has in five years driven down the backoffice cost from £40 a year per policyholder to about £12. It now handles administration for 10 million policyholders. That scale advantage is hard to challenge. Across all outsourcing areas, Capita claims 26 per cent of the market. Its closest competitor, Liberata, has 10 per cent. The shares, up 44p yesterday to 518.75p, now stand on 23.3 times earnings and yield 1.6 per cent. Pricey, but still worth buying.

Kesa

IT IS exactly three years since Kesa flew the Kingfisher nest, demerged as a separate pure play on electrical retailing across Europe.

The idea was that Kesa, best known in the UK for its Comet shops, would flourish as a standalone company, liberated from the constraints of its parent, and able to make full use of its specialist expertise and centralised buying clout in appliances.

It hasn’t been a huge success so far but, as the chart shows, it hasn’t been a disgrace either. Since independence, Kesa has just pipped the overall share market.

The shares have spiked higher three times — once after excellent Christmas 2004 sales and twice because of bid speculation, real and imagined. In March Kesa batted away a conditional private equity bid of 325p a share.

Yesterday’s first-half trading statement showed promise. Sales in all Kesa’s operations have improved dramatically between the first and second quarters. Much may be the result of the one-off flood of customers wanting fancier TV sets ahead of the World Cup.

Looking ahead, prices of flat screen and high-definition TVs will continue to fall, which should help to keep demand bubbling away, though at the expense of margins. Already, chief executive Jean-Noël Labroue is warning of a worsening overall margin, though this has so far been more than offset through productivity gains and cost cutting.

There are interesting developments ahead. The biggest operation, Darty in France, will this autumn launch the Darty Box, a gadget that combines TV, phone and PC. It is a big bet on the consumer appeal of digital convergence.

The shares, down 2¾p to 293p yesterday, trade on 14.8 times forecast earnings for the year to January 2007 and yield a tasty 4.2 per cent.

The company has yet to demonstrate that the pan-European strategy can really deliver. The underperforming French furniture chain, BUT, is a blemish. But the shares offer a reasonable income and should continue to be underpinned by bid speculation. Hold.

Stanley Leisure

CASINOS group Stanley Leisure has not got off to the best of starts in its new financial year. It sold its UK bookies chain last year, but retained an operation in, of all places, Italy, which of course has been clobbered by a wave of bets on the home team in the World Cup. Cue a £2 million loss.

Meanwhile, high-rollers in its flagship Crockford’s casino in London have been on a winning streak. It won’t last, but in the meantime Stanley was feeling a bit unloved yesterday, especially as it was unable to give shareholders any news on its putative merger with London Clubs International.

Despite strong performances from the provincial casinos, which have benefited from deregulation, Stanley’s results came in a little below expectations. The shares were marked down 29½p to 590p. Lord Steinberg, who founded the company with two Belfast betting shops 48 years ago, announced plans to retire at the end of this year. That may make carving up the top jobs with LCI a bit easier. Until there is firm news on the merger, however, the shares could drift. Pass.

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