Daily comment

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.

Private, Public and Third Sectors

As in so many things, Serco is often ahead of the crowd. A recent contact win provides a nice example of this.

Serco teamed up with Turning Point and Catch 22, two charities, to provde welfare-to-work service at its two new UK prisons. See here: http://www.ethosjournal.com/this_issue/casestudy3.asp

There’s lots of chatter about this sort of thing in political circles, but it’s tricky to do. Serco - and Turning Point and Catch 22 - deserve a pat on the back.

Serco’s trading

Form is temporary and class is permanent, they say. And Serco is certianly one of the sector’s class acts. But there have recently been whispers about a dip in form - not winning the nuclear de-commissioning role was uncharacteristic.

So what does the latest news tell us about how things are going?

The papers and tip sheets have been purring about £2bn of contract wins in the last six months, from Aussie prisons to Dubai airports. But this needs to be put into context: Serco’s a big group these days.

Its £16bn order book at y/e 2008 was the envy of the sector (at 5.2x sales its the largest of the 37 companies Credo tracks). But given Serco’s 10%+ annual growth target, it has ran through £1.6bn of this book in the first half. Adding £2bn of new wins leaves the book ahead just £400m, or 2%.

That’s a lot of new contracts, and a pleasing return to form, but not quite back to its best.

Sector MBOs

From the Centre for Management Buy-Out Research comes the latest data on private equity activity in the sector.

In 2008 in the UK, Business and Support Services saw 102 deals worth an aggregate £6.5bn. In the first quarter of 2009 there were 5 deals for a total of £8m.

For those of you who like these things, that’s an annualised fall of 99.5%.

Mouchel reports. The City notices.

At the height of the credit crunch last year, with the market in meltdown, Mouchel put out a good set of figures. And no one - but us - seemed to notice.

And now it’s Richard Cuthbert’s misfortune to put out a shocking interim management statement just after Atkins’ good results. And boy did the City notice: Mouchel’s just lost a third of its value.

Apart from general economic problems, which Atkins is weathering well, Mouchel’s statement betrayed a list of very specific concerns, among them: Dubai, rail, local government consulting (after splashing out on Hedra), BPO (after splashing out on HBS), the pension deficit, debt levels…

In short, a lot is going wrong at once.

Atkins - how to prosper in a downturn

Atkins’ results for the year to March show how well the best companies in the sector are (more than) surviving the downturn.

This downturn is very real - ONS announced that construction, which drives much of Atkins’ revenue, fell 9% in Q1 2009. Yet Atkins results suggest that the best companies are still making money. Their revenue is up 13%, margin ahead 0.3pp and EPS up 23%. Shareholders should be well pleased.

But tucked away in the notes is the fact that, of Atkins’ 18,017 staff at year end, approximately 600 were under notice of redundancy.

That’s not Atkins’ fault - any recovery can only be built by strong companies - but it is a reminder that, while GDP has bottomed and the stockmarket is up, there’s a fair but of pain still to be felt in households up and down the country. Unemployment will be rising for a while yet.

Serco wins in Dubai. The City notices.

Serco has just signed a £245m contract to run air traffic control at Dubai’s new airport.

That’s useful but just an extra 1% to an already groaning £17bn order book. Yet the shares today led the FTSE100 leader board with a 6% rise.

I guess some contracts are worth more than others, especially to the business once called ‘the biggest company you’ve never heard of’.

BSF. The ICT Scorecard

Tucked away in the notes to the Public Accounts Committee’s report on BSF is a table with the ICT suppliers for each of the 54 schools actually built or refurbished under the programme to date. Here’s how they rank:

1. RM, 18 schools (that’s a third of the market);
2. Ramesys, 9
3. Northgate, 6
4. Civica, 5
5. Redstone, 4
6. Amey, 3
7. VT & Morse, 1 each

[Seven of the schools, all in Newcastle, are being served by the council’s own in-house IT department.]

Amazingly, Partnership for Schools claims that there are 16 ICT suppliers active in the market. Half of these don’t yet have an operational school. Expect a shake-out.

The Public Accounts Committee report on BSF

On reading the Public Accounts Committee’s 34 page report into Building Schools for the Future, it’s hard to share the MPs’ rage at the ‘poor planning and over-optimism’ that, in its view, have bedevilled the programme. The alarming (and rather pompous) executive summary doesn’t seem to be backed up by the evidence.

Our prediction is that, once today’s press headlines are forgotten, the programme will roll on regardless. A programme that was slow to start is hardly likely to be easy to stop.

Capita acquires Carillion IT Services

It’s a simple deal: Capita is paying £36m for Carillion’s IT business, the old Stiell Networks for the relatively ancient among us. But it has a number of interesting lessons. Take your pick.

1. Paul Pindar’s still got what it takes after the unfortunate drubbing he took at the Competition Commission’s hands over IBS;
2. The deal is at a relatively racy 10x EBIT, suggesting there’s still life in old IT Services, a generally flat and low margin business…
3. …at least there is life in BSF. Carillion’s IT Services arm was an increasingly big player in education, on the back of its parent’s success, and this deal now pitches Capita squarely into the market;
4. Carillion has shown, on this and other deals, that now is a good time for builders to look to their balance sheets. Carillion ended last year with just over £200m of debt (3.5x EBIT) and obviously feels that this is a little high in these uncertain times;
5. We hear that this auction was all about trade buyers. There was a time when the trade said they couldn’t compete with private equity. In fact, in a world where debt has dried up, it’s private equity that looks hopelessly outgunned.

Springtime for PFI

One swallow doesn’t make a summer, but three deals this month - all involving Balfour Beatty - suggest the worst is over for PFI financing. Here they are:

• 1st May. Financial close on Fife Hospital PFI. £170m.
• 14th May. Financial close on Southwark Schools BSF. £200m.
• 20th May. Financial close on M25 DBFO. £6,200m.

And there are still 10 days of May to go…

Reasons not to go to Guernsey

I’ve always liked Guy Hands. The books he sends out each year show a man with a hinterland. I’d guessed he had the intellectual capaicty to see the world beyond the ratio of debt to EBITDA.

But now we hear he’s upped and gone to Guernsey.

A pretty coastline and its own breed of goat notwithstanding, I’d guess that what first attracted Mr Hands to Guernsey was its 20% tax rate, in painful contrast to our own 50p in the pound for high earners (like Terra Firma’s boss).

But, good God, there’s more to life than a few quid on your tax bill! Stay, enjoy London - at 1600km2 it’s over 20x the size of Guernsey, apart from anything else - and properly argue the case against iniquitous taxation.

Just don’t think that your leaving makes the case for you. If it sends a message, it’s the same one Debbie McGhee sent when, to paraphrase Mrs Merton, she was first attracted to multi-millionaire magician Paul Daniels.

Remuneration Consulting

Pity the remuneration consultants who had to answer to Samir Birko this morning.

Mr Birko, boss of Amec, woke up this morning to see this headline in the Times: ‘Shareholders give Amec chief thumbs down on pay’. Less than half of his shareholders backed the plan to give him a 14% pay rise to £750k next year.

£750k is, of course, a lot of money. But you can see the way the remuneration consultants were thinking. Amec’s a FTSE 100 company with a market cap of £2bn. Mr Birko has transformed it from construction to energy services since he joined three years ago, doubling the share price in the process.

Compare and contrast with John McDonagh at Carillion, another sector heavyweight. A similar (and good) record of transformation and growth, but Carillion’s outside the FTSE100, has a value half that of Amec and its share price is below its level of 2006. Mr McDonagh was paid £1.3m last year.

On this simple logic - I’m sure the remuneration chaps went to a bit more trouble - Samir Birko is underpaid. But now is just not the time and, after today’s headlines, Amec won’t thank them for forgetting.

A Spanish tragedy

Three headlines from yesterday’s El Economista (not our usual reading but we’re practising for our summer holidays):

“Ferrovial cae con fuerza por temor a ofertas bajas por Gatwick”

“Ferrovial apelará a la ‘clemencia’ de Londres para no malvender Gatwick”

“Ferrovial sólo recibe tres ofertas por el aeropuerto de Gatwick”

In summary. Terra Firma’s dropped out of the bidding and the other bidders (Citigroup, GE and Borealis) have low bid. Ferrovial’s share price has tanked and it’s asking HM Government to let it off its obligation to sell.

This isn’t getting much coverage in England - though the chaps at Amey must be watching closely - but it really is turning into a Spanish tragedy. First hubris (leverage), then nemesis (recession). It’s not looking good for Ferrovial.

A big cloud on the horizon

In a previous post (’A cloud on the horizon‘) we worried about the stockmarket’s enthusiasm for those companies shielded from the worst of the recession by their exposure to public spending. We weren’t wrong.

Stuck away on page 206 of the Financial Statement and Budget Report - the numbers behind the Budget - are Treasury’s projections for the growth in public investment. This year it’s +1.5% and in 2010 (election year) it’ll be +2%.

But after that, 2011, the Treasury projects a fall in public sector investment of 16.25%. Wow.

Private Equity reaches the bottom

The Corbett Keeling survey of private equity is now out for the quarter. And after Q4 2008 saw no buyouts of > €150m, Q1 2009 sees exactly the same level of ‘activity’.

Various sages of our new depression economics [Krugman, Bernanke et al] have recently been trying to cheer us up with the observation that things have at last stopped getting worst. But while, mathematically speaking, hitting the bottom is one way of arresting a fall, it doesn’t feel the same in the real world - and it’s surely nothing to boast about.

Strangely here at Credo we’ve seen the odd flicker of activity from our private equity clients recently. But whatever hope we do have isn’t yet in the data.

Timing

Here’s a lovely little line, stuck away in the Balfour Beatty report, where the Directors discuss their valuation the group’s of PPP assets.

‘The USD exchange rate on 30 April 2008, the acquisition date of Balfour Beatty Communities, was 1.98. At 31 December 2008 the exchange rate was 1.46, generating an unrealised gain on translation relating to the Balfour Beatty portfolio valuation of £51m.’

Balfour Beatty paid £177m for GMH [now BB Communities], a US military housing PPP specialist. The Directors’ valutation of the unit’s existing PPP assets now stands at £196m, helpfully boosted by that £51m. So Balfour is up £19m on the deal so far - and any future growth from BB Communities now comes ‘for free’.

Cash and the Middle East

Two snippets from today’s press releases from Atkins (pre-close update) and Balfour Beatty (annual report) suggest that, apart from declining demand, UK companies active in the Middle East are having to contend with clients who are suddenly reluctant to pay up.

From Atkins: “Cash collection has become more difficult, especially in the Middle East where there has been a worsening of approximately £25 million in the past three months…”

From Balfour Beatty: “Our result in Dubai, however, was affected by a cautious view of project recoveries and cash flows…”

As we’ve commented before, both Atkins and Balfour Beatty have benefited greatly from the boom in Dubai. As we’ve also pointed out both these companies go into the downturn with very healthy balance sheets. This is known as ‘fixing the roof while the sun shines’. Politics aside, that’s surely a good thing.

Atkins. Time to buy?

There’s a chap in the Credo office who bought Atkins in 2003 at 90p and watched as its price rose tenfold over the next four years. Our lucky investor stepped in when Atkins had been brought low by dumb management and a bungled IT implementation. Mike Jeffries then steadied ship and, in booming markets, Atkins’ inherent strengths (clever people and strong market positions) did the rest.

The situation today is a little different: Keith Clarke is no one’s fool and the markets are hardly booming. But Atkins’ strengths are the same, it has cash in the bank and offers a 5% dividend yield. The shares are 60% off their highs…

A cloud on the horizon

£20 billion is a lot of money. It’s the amount of fiscal stimulus promised by the government - and it’s responsible for much of the (relative) resilience of support and infrastructure services shares over the past year.

Spotting a cloud on the horizon is not difficult in these calamitous times. But here at Credo, otherwise relentlessly cheery at the prospects of the sector, we do wonder whether the bulls’ case is quite as strong as it appears to be.

Firstly, note that most of the fiscal stimulus is the temporary cut in VAT. That’s not going to help Hays, Carillion or Mitie. [And the disastrous deterioration of the public sector’s finances is mostly due to ‘automatic stabilisers’ - or paying out more in unemployment benefits - and that won’t help either.]

Secondly, remember that even with share prices at record lows, Balfour Beatty trades at 8x profits, G4S at 14x and Capita at 23x. A year of fiscal stimulus is welcome, but the valuations of the best companies need more than a promising few quarters. And, with the government deficit now climbing past 10% of GDP, you have to wonder about prospects further out than the next election.

The other day, Serco spoke of creating 30,000 jobs. Just 500 of these were in the UK. Sad to say, but that seems about right.

A modern parable

Once upon a time, there was a social housing business called Apollo Group. There still is. It’s a decent business in a sector considered attractive. But none of that explains what’s happened to it…

In 2006, the founder wanted to leave and Lloyds Bank Development Capital backed an MBO by the reminaing management for ‘an undisclosed sum (for our purposes let’s say this is £40m).

In 2007, Lloyds, perhaps sensing that it was a seller’s market, decided to sell. Everyone’s favourite purchaser, HBOS Integrated Finance, won the auction at a cool £410m.

In 2008, over a cocktail with the Prime Minister, Lloyds bought HBOS. There wasn’t time to do a proper due diligence apparently, though you might have thought they’d have had a good idea as to whether £410m was toppy or not for at least one of HBOS’s assets.

In 2009, Lloyds said its subisidiary HBOS made a pre-tax loss of £10.8bn.

You and I, to all intents and purposes, now own 65% of Lloyds, and by extension Apollo Group.

Effectively Apollo’s had four changes of owners in less than four years. There have been winners, (including, it must be said, Credo - we got a some fees somewhere along the line). But it’s unlikely that these deals, in aggregate, have added to the wealth of the nation. What a waste of time and effort.

Would Buffett invest in Balfour Beatty?

Pure chance of course, but today I find myself reading Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway alongside Balfour Beatty’s preliminary results statement.

Berkshire Hathaway saw its net worth reduce by $11.5 billion last year. But let’s not get carried away: that was a loss of just 9.6%, in a year when the S&P index fell 37%. Warren Buffett’s 44 year record of outperformance is still intact (20.3% compound annual growth vs. 8.9% for the index).

Balfour Beatty’s long-term record isn’t quite as good - no one’s is - but few beat it in 2008. Revenue up 27%, profit up 24%, earnings ahead 14% and a dividend pushed 11%.

The question is, would Warren Buffett invest in Balfour Beatty? I think he probably would. Here’s why…

Buffett’s not afraid of UK companies: he’s put over $1bn into Tesco. He likes businesses you can understand, and Balfour Beatty’s roads and buildings are nothing if not tangible. He looks for stable and committed management teams, as focussed on the intrinsic strength of their business as financial engineering. He runs a huge net cash position at Berkshire Hathaway, concerned to maintain his ‘Gibraltar-like financial position’, and he’d surely notice Balfour Beatty’s £440m of net cash - and its ambition to ever remain ungeared.

And finally, Buffett looks for businesses with durable competitive advantages - he calls this their “moat”. Contracting is traditionally a cut-throat industry, where new entrants can reach the top quickly (and fade just as fast). But with PPP and ever bigger government programmes, Balfour Beatty looks increasingly entrenched at the top of Britain’s contracting tree.

Capita and Health

In its last annual report Capita reported on its activities in nine sectors. The least of these was Health, at only 1% of group revenue. [Capita’s next smallest sector, Financial Services, is four times as large.]

Capita was, of course, signalling its intent. We’ll be as big in Health, Paul Pindar was saying, as we are in Central Government, Pensions admin and other areas that Capita has first targeted and then dominated.

Among the first moves Capita makes in a sector are canny acquisitions, not necessarily large in themselves but enough to buy its turbo-charged salespeople a ticket to the party. And that’s surely how we should read this latest deal:

CAPITA ACQUIRES HEALTHCARE INFORMATICS SPECIALIST, CHKS LTD
The Capita Group Plc (”Capita”), announced today that it has acquired CHKS
Limited from Healthcare Knowledge International for a consideration of £11.6
million. CHKS provides healthcare intelligence and quality improvement services
to healthcare professionals.
CHKS made an operating profit, on a pro forma basis, for its financial year to
31 December 2008 of £1.6 million on turnover of £8 million.

The Hungarians are Coming?

Filed under ‘proprietary intelligence’, a report from a widely-read source of merger gossip that states that Reneszansz, a privately owned Hungarian construction company, is negotiating to acquire a British company which restores historical buildings. ‘The target company is privately owned and has a long tradition in the sector’, said Miklos Balogh, co-owner of Reneszansz.

To us, this sounds like Wates. Privately-owned and known to have courted interest from buyers, Wates, with a big presence in the office fit-out sector, is likely to find the funds from any divisional disposal very useful just now. [Besides, Credo’s offices overlook London’s Transport Museum, so Wates’ working on old buildings has been noticed.]

We struggle to see that any such move presages a broader trend - “The Hungarians are Coming!” just doesn’t sound very likely. No, the interest for us is in wondering what Mr Balogh hoped to gain from letting himself be quoted like this. Apparently he was unwilling to name his target. If so, he should have tried harder to keep a lid on things.

Too much of a good thing?

Poor John Vallandingham’s demise, at 73, from being exercised to death by his wife reminds us that there can be too much of a good thing.

It’s beyond this blog to fully understand how HBOS managed to burn through £11bn in the last year, but we do know a little about its Integrated Finance division and that suggests that moderation wasn’t a quality much prized in the now-struggling bank.

Integrated Finance is a posh name for supplying both the equity and the debt in private equity deals. Common sense suggests that sourcing these separately might at least inject a useful sense-check into the deal process. And if you couldn’t raise debt for a deal during the credit bubble then you really should have had second-thoughts about the transaction.

So, freed of this constraint, armed with a strategy that identified support services as a good thing and fuelled by what, with hindsight, was ruinous hubris, HBOS Integrated Finance went out and did 18 leveraged buyout in 2007 and the first half of 2008. Half of these were support services companies including Miller, Apollo, Lambert Smith Hampton, Keepmoat and Charterhouse Print Management.

Read the full list here and weep. We like support services but this was just silly.

The market stumbles to the future

And as Baron Mandelson of Foy decides which engines of our future prosperity/ lame ducks (take your pick) deserve a government handout…

And as the global business and political elite confine the efficient market hypothesis to the dust (according to the summary of yesterday’s proceedings)…

Perversely, three bits of contract news point to where our future might actually be:

• Interserve and United Utilities announce a £500m PPP for waste treatment in Derbyshire;
• Amec and Balfour Beatty, separately, have been parachuted into JVs to help National Grid, a big customer for them over here, spend $2bn over in the US;
• Credo - yes, we’re part of the economy too - doesn’t have to announce its (very satisfactory) 2008 results. But we will let on that 40% of our work came from overseas projects. We even did a job in Madajascar.

I think the market’s telling is something. The future will have more recycling, more investment in electricity and more exports of services (especially if, like the UK, you’re good at this and have costs in a depreciating currency).

Personally, I think the market - perfect or not - points to a better future. We’ll just have to ignore the government-funded oversupply of sports cars and 4×4s.

 

Private Equity overdoes the pessimism

 Tuesday, 27 January 2009. Posted by Leo. Filed under Support Services, Private Equity.

Corbett Keeling’s ever fascinating survey of 500 private equity professionals hits my desk this morning.

The second prize for the most jaw-dropping statistic goes to the activity tracker. How many >€150m deals were there in Q4 2008? 0, zero, nothing! €150m is not, for private equity, a lot of money. But the market didn’t fall, it stopped dead.

First prize goes to the industry’s capacity for forecasting/ equanimity/ mathematics (take your pick). Do you expect activity levels in the >€150m segment to increase, decrease or stay the same, asked the survey. Two-thirds of respondents expected a decrease…

 

How to create a £1bn builder

 Tuesday, 20 January 2009. Posted by Leo. Filed under Support Services.

Contractors still measure themselves in turnover. Everyone knows the pitfalls of this as a gauge but that’s how the score is kept and £1bn is generally considered the mark of a really serious player. That’s when everyone noticed Ray O’Rourke: when in 2001 his £400m Irish player bought Laing, a £700m English blue-blood.

But there’s another way.

In 2003, Balfour Beatty spent £42m buying Mansell. Mansell was a good business - growing and profitable, with a public sector customer profile and net cash of £20m - but found itself constrained by a £30m pension deficit. It had sales of c.£500m.

Eric Anstee, Chairman of Mansell, commented at the time: “We believe that Mansell will be better placed to develop its business with the benefit of the greater capital resources of the enlarged Balfour Beatty Group.”

Mr Anstee wasn’t wrong. Roll forward six years and industry gossip says that Mansell will report £1bn of sales for 2008. That’s compound growth of 12% a year. And Mansell now returns to Balfour Beatty profits each year in excess of its net cash outlay in 2003.

Balfour Beatty is 100 years old this year. It’s sales now reach £10bn and it’s just been admitted to the FTSE100. Deals like Mansell - and its nurturing of the business since - are part of the reason why.

 

BBY and IRV

 Thursday, 15 January 2009. Posted by Leo. Filed under Support Services.

Balfour Beatty and Interserve have each put out their trading statements this week.

There are a lot of similarities. Balfour Beatty uses its 539 words to talk of ’strong progress’ and highlight its ‘resilient’ qualities. Interserve takes just 50 more words to report ’strong trading’ and emphasise its ‘defensive’ qualities. It’s a sign of the times: even when things are going well, our best companies have more need to reassure than boast.

Each company takes the trouble to report on things in the Middle East. Interserve is keen to point out that Qatar is its biggest market there and that prospects in Abu Dhabi are good. Indeed, while Oman and Bahrain also get a name check from Adrian Ringrose, you’d never know from the trading statement that Interserve had a business in Dubai. Balfour Beatty says simply that things are still good in the once-fashionable Emirate, though it’s taking a ‘cautious view’.

But the biggest difference is not to be found in the respective performance of the companies, but in their balance sheets. Time was when this didn’t matter, but nowadays you’d far rather be Duncan Magrath, Balfour Beatty’s FD, managing ‘net cash’ of £250m than Tim Jones juggling £250m of ‘facilities’.

It’s Interserve’s bad luck to also have its pension triennial review fall at the end of 2008 - it feels the need to signal to the analysts that this might mean an increase in ‘non-cash interest costs’. That’s as maybe, but while 12 months ago both Interserve and Balfour Beatty were trading at about 440p, today Interserve is 220p and Balfour 340p.

 

Exporting Services

 Tuesday, 13 January 2009. Posted by Leo. Filed under Support Services.

The UK is good at support services. The world’s a big place. It makes sense to export this expertise, if we can.

Anyone who’s been round a Dubai construction site and seen all the Atkins logos on the hi-viz jackets will realise that a lot of people from over here are making money over there.

Indeed, Credo believes that internationalisation will be one of the most important growth strategies for our clients in the next decade. As Carillion, Interserve and Balfour Beatty have demonstrated the future’s closer than we think.

So please note, three of this month’s deals: Compass - Kimco (US); Rentokil - Ray Werk (Austria) and Serco - Info Vision (India).

Go west, go east, just go.

 

Private Equity

 Friday, 9 January 2009. Posted by Leo. Filed under Support Services.

Telereal was first noticed in these offices a few years back. But with today’s £750m deal to buy Trillium, the Pears borthers’ property vehicle is going to find it hard to hide its light under a bushel for much longer.

What’s the secret of its success? Without bothering to boast about it, Telereal buys when prices are low and sells when they are high. Its last big deal was back in 2001, buying up BT’s estate when the phone giant was reeling after the bursting of the dot-com boom. Then Telereal waited to buy, preferring to sell off hundreds of surplus properties into the boom. The latest bust sees it moving back into the market again, when no one else is buying.

Such a strategy (buy low/sell high) is simplicity itself: that’s why every other private equity company boasts that it’s also their plan. The reality is rather different.

[Also today BC Partners commented on news that Foxtons has breached its banking covenants. “As housing markets fall, so do estate agents. In hindsight, we made the wrong assessment of the market” said Andrew Newington, a BC Partner. BC Partners paid £360m for Foxtons in July 2007]

 

The trouble with the police

 Thursday, 8 January 2009. Posted by Leo. Filed under Support Services.

Kier today announced a neat little contract to build and run six new police investigation centres in Norfolk and Suffolk.

Strategically, this seems to tick all the right boxes: long-term (30 years) and integrated (DBFO), with a public sector client that should survive even the worst that macro-economics can throw at it. Many other construction and services firms, seeing a collapse in their usual markets, are currently trying hard to so position themselves.

But here’s the rub. Kier’s contract, like Kylie Minogue, may be perfectly formed but it’s also somewhat petite. Six centres and 30 years (and heaven knows how much bidding angst) gets you just £60m.

That’s the trouble with the police: there just aren’t enough of them around.

 

Serco into FTSE100 on Credo scoop

 Friday, 12 December 2008. Posted by Leo. Filed under Support Services.

Richmond’s finest get their reward for years upon years of outperformance. It’s not just been about being in the right place at the right time (cf. David Ross; indeed, just where is Serco’s place? BPO, FM, wherever?), but about relentlessly passionate execution - see this CVJ from 2005.

Chris Hyman has worked hard for his success; we salute him.

But did a Credo scoop get him there? Yesterday (11th December) the news wires were full of Serco’s move into Indian BPO via the acquisition of InfoVision. You read it here first on 24th November. Maybe, maybe not: fast we may be, but we got the price wrong (£50m vs £25m) - Mr Hyman also drives a hard bargain!

 

End of an era

 . Posted by Leo. Filed under Support Services.

As the newspapers carry pictures of Davids Ross and Cameron, open-necked at a summer garden party, the weather outside only reminds us what a long time ago all that seems: leveraged property plays, ’sharing the proceeds of growth’, privately-owned banks…

And so today, the business pages similarly carry two other reminders of lost time, every bit as incongruous as Rich Wagoner’s corporate jet(s):

• Laing O’Rourke is facing a ‘winding up order’ as the famously feisty John Magnier - a sort of Irish Alan Sugar, but with real money - plays legal hardball over a failed Marbella villa development [must have seemed a good idea at the time…]
• And Salah Mussa (see previous posts), the new owner of Chestertons, wonders what to do with the chain’s three European offices …. in St Tropez, Gibraltar and Lake Como [must have seemed, etc. etc…]

It’s all such a long time ago.

 

Save yourself, strategically

 Thursday, 4 December 2008. Posted by Leo. Filed under Support Services.

Vincent Tchenguiz is a favourite of Credo’s blog: any man who, aside from walking out with Caprice, has the ambition to create a “Homeserve-meets-Erinaceous” deserves the odd post.

Consensus Group - “Experts in Finance. Imaginative in Business” - was to have been the vehicle for Mr Tchenguiz’s ambitious plan for a support services empire. Among his first moves was the purchase of Chestertons. But now it seems the plan has changed:

Tchenguiz said: “We have very much enjoyed working with Chesterton over the last three years, but for strategic reasons have decided to focus our efforts elsewhere.”

Consensus paid £2m, we think, for its 50% stake Chestertons. It’s selling out for an ‘undisclosed sum’. And if you think Tchenguiz is playing fast and loose with the meaning of the word ’strategic’ above, try this new take on the word ‘value’ from Chestertons’ new owner below…

“I am very appreciative of all the value that Consensus has added to Chesterton over the years”, Salah Mussa, Mercantile Group.

 

Strategy, its use and mis-use

 Tuesday, 25 November 2008. Posted by Leo. Filed under Support Services.

“Strategy” is the kind of word clever business people should be using, so they do. But that’s not to say that they mean what they say.

“A private equity stake sale could be an alternative to our IPO ambitions,” commented the CEO of SDG, a consultancy. “We were initially looking to float the business, but with the current turmoil in the financial markets, it wouldn’t be strategic.”

We think he means “possible.”

 

Serco eyes the future

 Monday, 24 November 2008. Posted by Leo. Filed under Support Services.

Serco has splashed out a skinny £50m or so for InfoVision’s 10,000 Indian BPO staff.

For us, Serco’s deal rings all the right bells: it catapults Serco into BPO, where it’s increasingly emerging as the main irritant to Capita’s otherwise serene progress; it looks like a cracking price (frankly, anything less than a bargain at times like these would reflect poorly on the buyer); it signals the emergence of the UK as a big player in a big new global support services market.

Was it only six months ago that Tata bought Land Rover and Jaguar? Tata’s deal cost it £1.2bn and heralded anxious headlines about the old West being bought up by the emerging East. Here at Credo we reckon returns matter too, and Serco should get as much from its £50m bet as Tata sees from 20x as much in a couple of tired old car marques.

 

Alternative futures

 Monday, 17 November 2008. Posted by Leo. Filed under Support Services.

“Never make predictions, especially about the future”, Samuel Goldwyn.

Good advice for most, but strategy requires that our clients take a view of the future - and just at the moment that’s not an easy thing to do.

Let’s leave the solution to this connundrum for another time. In the meantime, here’s an example of a forecast going somewhat awry. From Gordon Brown’s valedictory address as chancellor, March 2007…


“We will never return to the old boom and bust….Looking ahead to 2008 and 2009, inflation will also be on target….In 2008, alongside North America, our growth will again be the highest in the G7 — between two-and-a-half and three per cent….Our fiscal discipline is the foundation of the strength of Britain’s finances….Britain’s net borrowing, as a per cent of our national income, in the future years to 2011-12 will be 2.4%, falling to 2.0%, and then falling to 1.8, 1.6 and 1.4 per cent.”

 

The outsourcing event of the year

 Thursday, 6 November 2008. Posted by Leo. Filed under Support Services.

No, not a Credo party - worse, we’re even not invited. But something grander, more exclusive and more (erm) romantic…

Rod Aldridge’s wedding reception takes place at the Dorchester next month. It’s second time lucky for Mr Aldridge - think Equiniti rather than Capita - and we wish him all the best.

Ministers and permanent secretaries are unlikely to want to miss the canapes. But will Paul Pindar be there?

[More about Rodney M Aldridge OBE CPFA FRSA, in his own words: http://www.aldridgefoundation.com/site/web/about]

 

Raise the red flag for FM

 Wednesday, 29 October 2008. Posted by Leo. Filed under Support Services.

Credo is used to defending the public services industry from those who think it does little but take money from “schools ‘n hospitals.” But we hadn’t previously thought of arguing that retaining local caterers and cleaners might be contributing to a class-ridden society. Here’s MITIE’s MD for PFI on the nuances in Building Schools for the Future contracts:

“There appears to be an increasing trend for Design and Build Schools (D&B) to procure only part of the Facility Management services and in particular to exclude soft services. The approach for PFI schools however is to procure full FM Service. The result of this will be that over time, a two tier estate will emerge with different standards at potentially neighbouring schools. The consequences of this will be a deterioration of the D&B school and a knock-on effect on the education standards within that school.”

 

Practical Keynesianism

 Wednesday, 22 October 2008. Posted by Leo. Filed under Support Services.

“With the economy in a hole, start digging…”

So goes the standard Keynesian response to a downturn. And the builders of Britain, shovels at the ready and eyes on their share price, are ready to help out if called.

But how practical is this?

As veterans of BSF - to take one public sector building scheme among many - will attest, there’s often something of a lag between policy and activity. Indeed, if we try and prime the pumps the BSF way, we should expect a notcieable uplift in spending after seven years or so - just in time to help the next boom boil over.

The chancellor’s promises to bring forward government capital spending should be treated with a pinch of salt.

 

Private equity and the crunch

 Monday, 20 October 2008. Posted by Leo. Filed under Support Services.

It’s an article of faith amongst private equity professionals that the real money is made in the downturn. But for all the boasting, the latest CMBOR survey from Barclays Private Equity makes it very clear that the buy-out boys, like the rest of us, tend to run with the herd: buying when things are expensive; gun-shy when the market is supposedly awash with bargains.

And so, deal value in the first half of 2008 was down 53% on H1 2007.

Regular readers of this blog will not be surprised that this crunch wasn’t evenly spread. Big deals (>£500m) fell much more, 58%, than small and mid-sized deals, down 44%. Deals in retail fell an astonishing 94% and in property and construction 81%; business and support services were at more of less the same level as a year before (off just 2%).

This chimes with our view of how our sector weathered the early part of the year. We wait to see what effect the dramatic events of the last few weeks will have on the second-half. We’d guess most private equity will still be sitting on its hands: contrarian investing is a lot harder in practice than theory.

 

Mouchel up. Did anyone notice?

 Wednesday, 8 October 2008. Posted by Leo. Filed under Support Services.

We yield to few in our fascination with the support services sector. But even we’ve found our attention wandering to goings on in other parts of the business press in the last few weeks.

So Mouchel had to shout to get noticed. And its full year results announcement on Tuesday gave it a fair crack: revenue up 46%; profit up 27%; the dividend increased by a fifth. That’s a good result from a Credo favourite.

But did anyone notice? Not to judge by the press - there wasn’t any to speak of - but the shares are up 40p (+13%), so someone’s buying.

 

What the bank bailout means for us

 . Posted by Leo. Filed under Support Services.

“The government is to invest £50bn of your money in British banks so they can lend it back to you with interest.”

[Source, The Daily Mash].

And with that, Credo’s stance of real-economy optimism (see previous posts) is put on hold. We’re OK, so are (most of) our clients; we’ll just have to wait and see

 

Take your pick

 Thursday, 18 September 2008. Posted by Leo. Filed under Support Services.

Redrow shares gained 8% on bid rumours yesterday. So far so normal. But what were the rumours? Take your pick:

• Bovis Homes might be considering a bid, says the FT;
• Redrow will merge with Barratt, says the Independent;
• Toscafund, a hedge fund with 27% of Redrow, also has a long position in Washington Mutual, a US bank subject to swirling rumours of its own. According to this alternative theory, also cited in the Indpendent, takeover speculation about Wa-Mu is driving the price in Redrow. [Quite how wasn’t explained];
• The Daily Telegraph quotes a trader as saying that Lehman Brothers had loaned out Redrow shares to short-sellers and, having (ahem) troubles of its own, was now having to call these in, driving up the price;
• More prosaically, The Daily Telegraph also suggests that Redrow has been approached by Persimmon, or maybe Bellway, about a takeover.

One British builder, one day, five different market rumours. It’s that kind of market at the moment.

 

Jarvis, any port in a storm?

 Tuesday, 16 September 2008. Posted by Leo. Filed under Support Services.

Surveying the wreckage of the stock boards, with shares in such service sector blue-chips as AMEC, Atkins, Balfour, Capita - heck, nearly all of them - showing 20p+ falls, who stood out in the sea of red? Recording a 0.75p rise, Jarvis, almost uniquely, showed a gain.

Is Jarvis, with borrowings of £42m weighing on its £35m market cap, now a suitable home for widows’ and orphans’ savings? We doubt it. More likely, yesterday’s rise was further evidence that Richard Entwistle’s efforts to turn the railway engineer into a ‘normal’ company are not done yet.

Yesterday was one of those days where Jarvis might have preferred to fall with the crowd.

 

Johnson feels the pain

 Thursday, 11 September 2008. Posted by Leo. Filed under Support Services.

Here’s an extract from Johnson’s latest results (source: Press Association)

“In facilities management revenues were 51.6% lower at £23.2 million after a major customer took work in house.”

Ouch.

 

Serco, the word count

 Friday, 29 August 2008. Posted by Leo. Filed under Support Services.

Serco’s interim results statement contained much of interest. But it took over 10,000 words to say it. By contrast, Capita managed to get things off its chest with half this many.

Both businesses have much to boast about. Both are complex beasts that take a lot of explaining. Each has a similar obligation to pad their reports out with formulaic nods to the various regulatory regimes. But why is Serco so much more prolix in getting out its message?

Our pet theory is managerial. Serco, strangely for a company that operates a ‘lean’ and decentralised model, somehow finds itself with a Director of Corporate Communications and a Head of Investor Relations. Put each down for a bit of job-justifying hackery and you quickly have a 50 page half-year review.

 

Serco disappoints (relatively)

 . Posted by Leo. Filed under Support Services.

Serco’s interim results today boasted earnings ahead 21%. This is a cracking result in recessionary times - but how does it measure up to Serco’s own high standards?

Earnings ahead 21% is bang in line with historic performance. Serco’s done this for most of its twenty years on the stock market. Keep it up for another twenty and Chris Hyman will have over a million colleagues (and even less free time).

Our cavil is Serco’s historic success is built on organic top-line growth. It’s been bidding and winning new contracts that has driven shareholder value.

But in this half-year, Serco relied as much on margin enhancement (ROS, 4.9% to 5.2%) as old-fashioned business development. In one sense, this is welcome - other postings here have been sniffy about Serco’s margins - but this blogger prefers Serco as a growth stock. Serco will have to mature one day, but surely not yet.

 

Situation excellent

 Friday, 15 August 2008. Posted by Leo. Filed under Support Services.

We like and admire Garvis Snook, Rok’s chief executive. He’s built a £1bn business; he stands out from the crowd; he’s been guest of honour at a Credo breakfast - what’s not to like?

To these credits, add this latest pugnacious response to the crystallisation of a £l;15m trading loss and closure costs at Rok’s development arm.

“Rok will use funds from the closure of its property business to make acquisitions” [Unattributed briefing, FT]

It brings to mind Marshal Foch, the WWI general:

“My centre is giving way, my right is in retreat; situation excellent. I shall attack”

And it’s worth remembering that, after a scrape or two, Foch won.

 

PR speak

 . Posted by Leo. Filed under Support Services.

But not even Rok’s natural embullience can survive the dreary dampening of modern coporate communications.

So here’s how the interim statement describes Rok’s closing of its property division:

“Rok’s strategy remains unchanged but our business mix is evolving”

That’s one way of putting it.