Credo works widely in the business and support services sector and every day we discuss issues that grab our attention. What comes below are the personal opinions of individual consultants. It's a blog, not the considered opinion of Credo as a company.
We’re keeping a tally of the number of local government consultants being taken over by bigger companies looking to buy into this niche market.
We had four - with Atkins, Northgate, Mouchel and Serco the buyers - when we last wrote in March.
Now there’s one more: 13th June 2008, Tribal buys Helm. The quick nos. are £15m (£13m of that in cash) for 72% of Helm. That puts a value of £21m on Helm’s 82 people (£250k per person), which is pricey.
As public spending slows, the private sector has quickly assessed that not all the suppliers grown fat in the boom years will survive.
In public sector software, for example, the UK’s specialists suddenly looked especially exposed. So they’ve been looking for shelter. Here’s a quick list of recent deals:
We have the sense that IBS gave up as others rushed out the door. The price achieved, for all the talk of a 65% premium, was less than it had been trading at six months ago. But the City had given up on it even earlier [see post, http://www.credo-group.com/comment/archives/340], so IBS probably had little choice.
Whatever the merits of the deal for IBS shareholders, you’d rather be in their shoes than Anite, still unloved and without a home after serial attempts to sell itself. With so much activity going on around them, being left on the shelf must be galling.
MITIE is an innovative company in many ways so it was no surprise to see its Chief Executive, Ruby McGregor-Smith, deliver the latest results presentation on web-cam.
We applaud her for doing this and only wish all companies might provide similar windows on their thinking.
We’ve been critical before of MITIE’s strategy - but never its results - so here’s a transcript from the part of the presentation dealing with, in Ms McGregor-Smith’s own words:
“…Just talking through our strategy, the strategy is very much to deliver stakeholder value through a focus on sustainable profitable growth and it’s broken down into four key areas, which I’ve listed on the slide , which are stakeholders, sustainability, profitability and growth. We have an uncompromising commitment to all our stakeholders, which include our shareholders, our customers, employees in the wider community. Equity and centralization has always been at the heart of our ethos and that continues to be the case. Sustainability is about building a business responsibly and for the long term, managing the growth rates within a reasonable level and planning our resource requirements adequately. It’s also about aligning our strategies and goals with those of our customers which is something I’m going to come on to talk to you a little bit about later.
We focus very much on growing the business profitability and maintaining our margins within their target ranges. And I think finally, as you know we’re very much a greater company and we operate in fragmented markets and that are growing quite quickly and I think we’re still very well placed to maintain our record of growth….”
The UK rail market is often more akin to an Old Testament morality tale than modern business. And Jarvis generally gets to play the hapless Jonah, Job or Joseph (take your pick).
Last year was the famine - a £27m loss. This year a comparative feast, £11m profit.
Richard Entwistle stays reasonably cheerful despite it all. He talked in the latest results of ‘unprecedented spending’ on the network.
There you have the rail industry in a modern parable. Long-term we’re all bulls - there’s lots of cash about and plenty of ways to spend it - but the journey isn’t for the fainthearted.
We’d trailed it here before but now the news is in. Balfour Beatty (plus Atkins, Skanska and Egis) is preferred bidder for the M25 widening contract.
More short-term misery for motorists, but short-term joy for Balfour Beatty shareholders (up 15p on the news). And in the longer term we’d also rather be Balfour Beatty than on London’s orbital motorway.
Obviously the credit crunch is big news if you’re a bank - ‘RBS firms up plan for a £12bn rights issue’ [Scotsman]. Equally obviously it has wider effects - ‘Pets at Home rules out float as sales of luxury fish tanks sink’ [FT].
But falls in specific sectors, however large, are just the cut and thrust of capitalist adjustment. A nation can have enough domestic aquaria. What everyone’s worried about is recession, when we all fall together, and the good go with the bad.
So how are things so far? What news from support services?
All good. Erinaceous and Johnson Service Group are dead and very ill, but you can’t blame Mervyn King for that. The good companies are looking good. The next CVJ will have the figures.
Not a client but, hey, they can’t do everything right… Carillion is enduring some bad press just now, prompted by its shake-out of recently acquired Alfred McAlpine.
At least 350 jobs are to go at McAlpine’s base in Tannochside, the old HQ of its 2002 acquisition Stiell. The local paper is up in arms and there’s even a Facebook group called ‘We hate Carillion’*.
We don’t know the ins and outs. We sympathise with those having to look for new jobs. But from where we sit, that there are even 350 jobs to cut at an old Facilities Management HQ is evidence of plenty of fat and a lack of integration into the old McAlpine.
Carillion’s right to fix that - and in business being right is more important than being loved.
*’We hate Carillion’ currently has 17 members. Disappointingly, there’s no one there we recognise.
Mouchel and Serco are two companies we admire. And in a match-up each has strengths to call on. We’d be hard pressed to choose between them. But, curiously, it seems that one company naturally defers to the other. Here’s a quick exerpt from Mouchel’s interim statement:
“The HBS brand has been discontinued and the business already merged with our existing Government Services business stream, all under the leadership of a new managing director, who has been recruited from Serco.”
Why the name check for Serco? Why the implication that a Serco staffer must necessarily move Mouchel on as a business?
Mouchel has a top tier local government BPO and consulting business; Serco’s business, built around its acquisition of ITNet, is nothing to get excited about. Yet Richard Cuthbert appears to be sub-consciously defering to Chris Hyman. Odd.
A month or so back, Centrica splashed out £20m for 10% of Ceres Power. Ceres is developing CHP (combined heat and power units) units for residential use.
Today Ceres announced its figures for the half year. Sales were up from £30,000 to £279,000. It does have one significant customer signed up - Centrica, since you ask - but otherwise that’s that.
As the world adapts to climate change, energy majors like Centrica need access to start-ups like Ceres, even at a price of 360x sales. And knowing how badly all those internet investments turned out the last time majors went shopping for new technology doesn’t make it any cheaper to play in the current energy boom.
When New Labour was in the ascendancy no one padded the corriders of power with more diligence than Capita’s Rod Aldridge. But Mr Aldridge is no longer in the box seat at Capita - an excess of Blairite diligence brought him down - so it’s left to Paul Pindar to place the outsourcer’s bets. An article in the Times today suggests that the former No.2 senses a change in the weather.
“If the BPO industry has one person to thank for its early acceptance and then huge growth,” says Capita’s new front man, “it is Margaret Thatcher…”
As Police Chief Renault says in Casablanca, “I blow with the wind, and for the moment the wind is blowing from Vichy.” Ideological conservatives might wince, but that’s politics.
We made much of the opportunities for British service companies overseas in a CVJ article from 2003 and repeated this again last year. And here, from Interserve’s latest results is a neat illustration of what we mean.
For the first time the contribution from Interserve’s construction activities in the Middle East (£15.9m) surpassed that of its UK operation (£13.5m). That UK division is one that we particularly admire and, while we doubt that the boys in Dubai have built a business with such resilience, you wouldn’t bet against them making yet more money next year.
PS. Taken together, the UK and the Middle East make Interserve Construction the largest of its four divisions. Yet you wouldn’t guess this from the results presentation. Construction is listed third, behind FM (which does FM) and Specialist Services (which ‘provides a variety of outsourced services which are usually delivered discretely but can form part of a bundled package through Facilities Management’ - presumably also FM.)
Local government suffers from a lack of glamour. But someone cares.
Here at Credo we’ve noticed that a mini-flurry of activity has been taking place in local government consulting. Four small-to-medium consultancies have been snapped up by bigger support services players in the last eighteen months.
We reckon this is a smart and rational response to broader changes in the sector (Varney, Gershon et al). The companies below have backed that insight with more than words:
Here are the first six growth figures from Balfour Beatty’s results presentation: +36%, +48%, +28%, +26%, +29%, +25%. For the record that’s growth in revenue, profit, eps, dividend, cash from operations and order book.
To our mind, this confirms a number of themes Credo’s been banging on about:
Here’s the opening of Rentokil’s results statement:
“Revenue up 20.3% to £2,216.7 million. Full year adjusted operating profit and adjusted profit before income tax up 8.8% to £280.8 million and 1.1% to £211.4 million.”
Here’s the opening of the AFX news service on those same results:
“Rentokil Initial PLC today issued another profit warning saying that 2008 profit will be significantly lower than in 2007, after reporting a 14 pct fall in full-year underlying profit.”
Clearly there’s a difference of presentation here, at the very least. Whatever, the City has just marked the shares down 26p: that’s a quarter of Rentokil’s value gone in a morning.
[And Credo’s view? Here’s what we said two years ago. Here’s what we said a year ago. Here’s what we said just a month ago. We have a lot of sympathy for Doug Flynn and respect for the scale of the task he and his team are undertaking. He’d have been better served by the City appreciating the operational and business pressures he faces rather sooner.]
Now that HM Queen has approved the bill to nationalise Northern Rock, there really can be no argument about it: Northern Rock is part of the public sector. And as such, there can be no surprise to see the government’s favourite consultancy McKinsey working with Ron Sandler.
It’s said that McKinsey is to work on a business plan for the bank. To this task it brings extensive experience from other large UK clients such as the NHS and the MOD. The stated intention of the government for Northern Rock is ‘business as usual’, so it might well get its wish, if not without incurring some fancy bills.
The clever thing is how Jermyn Street’s finest keep on selling themselves as private sector experts, here’s a good example.
We recently received a (spoof) e-mail report on British Gas’s recent record profits. You know how these things go but it illustrates a point about business, and how to make money, nonetheless.
“BRITISH Gas has said its 500% increase in profits is the result of charging people much more money to buy gas. Unveiling its annual results, the company insisted the £480 million profit jump vindicated its strategy of making it a lot more expensive to cook food and keep warm.”
And here’s Skanska with a similar, if opposite, insight. Sales in 2007 were up 44% but profit was down 7%. Why?
“David Fison, the chief executive of Skanska UK, said profit would have risen in line with sales had it not been hit by problems on unnamed projects.”
In the four years 2004-2007 inclusive Balfour Beatty has acquired the following companies: Gammon, Signalbau Bahn, Pennine, JCM, Edgar Allen, Charter, Birse, Centex, Exeter Airport, Cowlin and Covion.
These eleven companies have variously extended its UK footprint, moved into higher value markets, bought it a significant US business, added technical capability, deepened its infrastructure investing, etc etc… all-in-all, Balfour Beatty is a much stronger business than four years ago.
But here’s a thing. The total consideration for that little lot was £300m, according to Merrill Lynch. At the same time it sold Andover Controls and its stake in Devonport Dockyard, releasing £302m, on our calculations.
That’s a transformed business for a net £2m (inflow). That’s a (very) small price to pay - and great business.
No one said accounting was simple, and accounting for PFIs gives more scope than most for creative interpretation. Mostly this results in changes which, to put it charitably, surprise on the downside. But here’s a nice example of things going the other way:
[RNS 11.02.08] “Kier Group plc announces the disposal of its 50% PFI investment in Hairmyres Hospital… The consideration totalled £13.8m, which was received in cash… The transaction will result in the disclosure of a profit of around £16m.”
There you go. £14m in cash and a profit of £16m. The difference? Profit from a previous refinancing, prudently deferred until now.
Take a bow, Deena Mattur, one of the only female FDs in the sector. She’s had some, ahem, difficult publicity over the last year, but today was a good day for her and her profession.
Here’s one from the Walsall Advertiser. This illustrates both Credo’s wide reading in search of support services stories - and also the power of brand (something we’ve commented on before).
“Serco has won the contract to run education in the borough for the next seven years… Serco fought off stiff competition from the management services company Amey. Amey is best known in the borough for installing and maintaining street lights.”
Serco does all sorts of things, some of them a lot more ‘trade’ than street lights. So what did Amey do to deserve such a very-British slight from Walsall’s newshounds? We guess that’s the power (for good or ill) of brand.
We’ve commented on Metronet here too many times to link to the articles but you can find them if you use the search bar to the right. Rather than continue to rail about it, we present below a few stats.
It doesn’t sound that good. But for some people, the situation seems anything but. We can’t see the obvious flaw in the following analysis but if there is one (and there must be, surely?) then please let us know…
Nice work if you can get it. Northern Rock, anyone…?
Carillion’s acquisition of Alfred McAlpine should become effective on 12th February. But corporate activity is not all that the Big C has been up to recently – in the last week the Monteray consortium (in which Carillion, Balfour Beatty and Reliance Security participate) has retained its BT FM contract (6+4yrs, worth £500m) and Carrillion’s Nottingham LEP JV has won the £208m Nottingham BSF contract.
All this and yet the share price is where it was at the start of the year. John McDonough could reasonably wonder what else he has to do.
VT and Babcock (see previous posts) often seem to run on parallel tracks. And so it’s been in the last few days.
Each has announced a deal to buy into nuclear services. VT, on last Friday, with BNFL Project Services and Babcock on Tuesday, with International Nuclear Solutions.
It’s not copying that’s got the two companies to the same place at the same time; it’s strategy. Moving out from a reliance on defence shipbuilding has pre-disposed each to seek markets with ‘mission-critical’, long-term, engineering-based contracts. Throw in the weary familiarity each has with difficult customers - the MOD, the NDA - and you get the parallel announcements of last week.
Here at Credo, we expect both these moves to pay off. The only cloud on the horizon is that business success, like finding the best holiday spot, sometimes relies on others not having the same idea. There should be plenty of money going around in nuclear. Babcock and VT will just have to share.
IBS is a local government software company. Here’s its pre-close trading update from 17th January:
“Revenue, profits and earnings per share showed year on year growth compared with 2006 although slightly short of analysts’ formally published expectations. Operating margin…was broadly similar to the previous year.
The sales growth rate in the second half, which was partly driven by further market share gains was, however, tempered by some tightening in market conditions; these conditions are anticipated to continue into 2008 but the Board also remains confident of further market share gains.”
Not jumping for joy, but nothing to scare the horses, you’d think. In fact, the shares promptly dropped 20%. Ouch.
Here’s a snippet from Hawkpoint’s review of the year.
“Our restructuring team was active, particularly in the second half of the year. It is currently advising ISTC, an Irish company that invests in bank capital, on its recapitalisation options.”
There you have it.
The FTSE100 hit a new year low today, bringing the index back to its level of last August. And who has dragged it down most? Retail (off 39% since the summer) and support services (off 33%).
Retail’s poor performance even we understand - debt and rising utility bills must be hitting spending. But support services - in our sector we reckon demand is strong, so why the gloom?
It’s time for optimism. Buying Atkins, Serco and Capita would give you three growth stocks, buoyed by infrastructure investment, outsourcing and public spending incontinence. Avoiding Rentokil, Compass and Experian would save you worrying about execution risk, management competence and American credit cards. Job done.
PS. I found out the other day that Credo’s amateur share club was long on Royal Bank of Scotland. ‘I have faith’, says one of the duff stockpickers. He’d be better off relying on analysis: there’s better value closer to home.
Every new year the newspapers pick their top shares for the year ahead. Journalists are paid to write not invest money, but, hey, it’s all good fun - and sometimes instructive.
Last year the tips were full of business services companies. Amec, VT, Xansa, Compass, Atkins and Intertek all featured. I haven’t gone back and checked but I reckon this would have been a good portfolio. These are all good companies (well, most of them are) and ours has been a strong sector.
And this year? A quick skim through the Times, Telegraph, Guardian and Independent throws up lots of oil and energy companies -and someone* even picks Northen Rock as a ‘gamble’ - but only one business and infrastructure firm features.
That firm is Balfour Beatty. It’d be Credo’s top tip for 2008 too, but where are the others? There’s plenty of demand for our sector, businesses are well-capitalised and cash-generative. There are always hiccups but surely a bit of analysis could help you avoid these. Credo would have been far more bullish than the papers. We’ll see…..
*That someone is the Independent. Just so you know.
Private equity chaps are smart johnnies so they’ll be aware that the trick is to buy low and sell high. And indeed, as the every downturn starts to bite, there’s always a lot of brave talk from the sector about the opportunities likely for the savvy investor.
So what do the data say?
The data from the CMBOR (see previous post) say that the historic peaks in investing activity have been 1989, 2000 and (most likely) 2007.
The suggests that the sector as a whole - 3i appears to be a notable exception - is buying high and selling low.
Barclays funds the Centre for Management Buy-out Research and its data are the best around for tracking activity in the UK private equity market.
Just this week, I open a nice mailer from Barclays with the figures up to Q3 2007. ‘Figures for the first nine months reveal that 2007 is already a record’, it says.
And today, I see in the Times that the CMBOR has put out its Q4 numbers. ‘The volume of British buy-outs tumbled 80% in the fourth quarter.’
Print runs and holidays can make fools of us all, but it’s clear the market has changed.
Back in the office and I open the traditional present from Guy Hands of Terra Firma. It’s a book: JK Galbraith’s ‘The Great Crash of 1929′.
This’ll now be sitting on thousands of desks across London and the UK - Credo is hardly the most important company Terra Firma deals with - and it should give plenty of people pause for thought.
Guy Hands’ own musings on crashes and the coming year are sent with the book. These are commendably straightforward and self-critical. Credo remains optimistic about 2008, but Mr Hands’ is an attitude we’d all do well to copy.
Happy Christmas. We’ve had a fabulous year, and so have many of our clients. There’s plenty of comment elsewhere about what 2008 might bring for the markets. But let us just wish you all health and happiness, and a well-deserved break.
Here’s the chairman of Northern Rock welcoming Andy Kuipers as new chief executive of the beleaguered bank.
‘I am delighted that Andy has joined the board. I am confident that he is the right person to manage the company through the strategic review process‘
Our italics.
Lots of Credo’s clients (and a few others in the business services world) have been buying and selling in the last few days. In case you’ve missed the flurry of announcements, this is what’s been going on: