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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.

 

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.

 

More local government consolidation

 Wednesday, 6 August 2008. Posted by Leo. Filed under Support Services.

Not consolidation of local authorities themselves - the public sector doesn’t change its structures just because they cease to work - but more IT company match-ups in the face of falling demand.

Over the weekend, Anite’s sold its public sector IT division to Northgate. The price, we’re told, diluted earnings for Anite - and it can’t have been easy for KKR-backed (and debt-fuelled) Northgate to raise finance in these markets - so you can imagine that Anite’s hand was forced.

Local government IT is consolidating, and consolidating fast. Here’s the updated tally of deals in the last 12 months:

 

Business Stoicism

 Monday, 4 August 2008. Posted by Leo. Filed under Support Services.

This from the latest Contract Journal:

“Keepmoat, the social housing specialist group, changed hands in August 2007 at the peak of the market when its founders, Dick Watson and Terry Bramhall, sold the group for £780m to the HBoS bank.

Today Keepmoat is worth 40%-50% of its value a year ago, suggesting that £400m has simply evaporated.
So do Keepmoat’s buyers now regret their move? Their answer is ‘no’.”

Stoicism, even in these more emotive times, is still a virtue. But, even in business, it doesn’t change the score.

 

Back to the status quo ante

 Tuesday, 29 July 2008. Posted by Leo. Filed under Support Services.

An interesting survey hit my desk last week: Corbett Keeling’s taking of the temperature in private equity. Based on 500 interviews with private equity johnnies, Jim Keeling describes conditions as “surprisingly buoyant”, suggesting that 2008 is not so much 1929 all over again, but 2006. In other words, it’s not 2007 but it’s still good.

Here are some of the highlights from the survey:

So, things are poised, pricing is coming down - and, with or without the banks, deals will still be done.

Like us, Corbett Keeling are left feeling a little perplexed by what their own data tell them - “things are OK” -, and what the market mood suggests - “we’re all doomed”. We remain among the optimists.

 

Consulting and BPO

 Monday, 21 July 2008. Posted by Leo. Filed under Support Services.

Compare and contrast these snippets of news.

First up is another local government consulting acquisition where Tribal has bought again. This time it’s RSe, whose 30-or-so people do a little bit of strategy consulting for a lot of local authorities. Financial details aren’t available but, for the purposes of this blog, let’s take Tribal’s equally recent acquisition of Helm, whose 82 people went for £21m.

Then look at BPO. HCL, an Indian outsourcer, has just bought a unit of Liberata, the UK BPO outfit. Liberata Financial handles the life policies of Sun Life, AXA and Barclays, among others. It has 800 people, £30m revenue and an order book of over £250m. The cost to HCL? About £1m, say reports from India.

Five years ago private equity, such as General Atlantic, Liberata’s owner, was pouring money into BPO; consultancy was ignored, derided as unbankable. That looks to have been the wrong call.

 

Worried? Not quite yet.

 Thursday, 10 July 2008. Posted by Leo. Filed under Support Services.

Credo’s optimism in the face of the gloom in the papers is not based on the fortunes of its in-house share club, whose fresh disaster last quarter saw it switch, like a Jim Carry/ Jeff Daniels movie, from banks to housebuilders…

Instead our optimism has been based on the performance of our clients and the business and support services sector. Some sectors have been hit hard; others powered ahead. That’s not a recession, it’s a periodic adjustment.

So, as Balfour Beatty, Serco and other sector blue chips have continued to fare well, we’ve kept our cool. That’s why Morgan Sindall’s pessimism is a little troubling.

Predictably, John Morgan talked down the prospects of his ‘open market’ housebuilding operations - but these are just £100-150m or so of MS total revenue. More worryingly for his investors, he also pointed to ’softening’ in office fit-out. Here, in Morgan Lovell and Overbury, the firm has £500m of sales and acts as an indicator of broad commercial office market activity. A slowdown here is more worrying.

We’ve not joined the pessimists yet - Morgan Sindall’s fit out operations are focused on the South East and, we’d guess, disproportionately dependent on financial services - but it does leave our optimism less well-underpinned than before.

 

Local govt consulting, continued

 Thursday, 26 June 2008. Posted by Leo. Filed under Support Services.

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.

 

Carillion, that fraud in context.

 Tuesday, 24 June 2008. Posted by Leo. Filed under Support Services.

 

Another one bites the dust

 Thursday, 5 June 2008. Posted by Leo. Filed under Support Services.

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’s strategy, live and uncut

 Tuesday, 3 June 2008. Posted by Leo. Filed under Support Services.

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….”

 

Jarvis

 . Posted by Leo. Filed under Support Services.

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.

 

Balfour lands a big one

 Monday, 12 May 2008. Posted by Leo. Filed under Support Services.

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.

 

The credit crunch and its effects

 Monday, 21 April 2008. Posted by Leo. Filed under Support Services.

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.

 

We love Carillion?

 Tuesday, 8 April 2008. Posted by Leo. Filed under Support Services.

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. 

 

Strategic cringe?

 Tuesday, 1 April 2008. Posted by Leo. Filed under Support Services.

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.

 

Hot energy

 Wednesday, 26 March 2008. Posted by Leo. Filed under Support Services.

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.  

 

Capita senses a change in the wind

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

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.

 

Making it big overseas

 Tuesday, 11 March 2008. Posted by Leo. Filed under Support Services.

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.)

 

The future of Local Government

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

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:

 

A good year

 . Posted by Leo. Filed under Support Services.

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:

 

Rentokil - ouch

 Thursday, 28 February 2008. Posted by Leo. Filed under Support Services.

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.]

 

McKinsey and the public sector

 . Posted by Leo. Filed under Support Services.

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.

 

Sometimes business really is simple

 Friday, 22 February 2008. Posted by Leo. Filed under Support Services.

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.”

 

Balfour Beatty’s (small) spending spree

 Tuesday, 19 February 2008. Posted by Leo. Filed under Support Services.

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.

 

PFI accounting

 Tuesday, 12 February 2008. Posted by Leo. Filed under Support Services.

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.

 

Amey’s brand

 Monday, 11 February 2008. Posted by Leo. Filed under Support Services.

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.

 

Metronet - yet more…

 Friday, 8 February 2008. Posted by Leo. Filed under Support Services.

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 - on a roll

 Thursday, 7 February 2008. Posted by Leo. Filed under Support Services.

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.

 

Parallel lives

 Wednesday, 23 January 2008. Posted by Leo. Filed under Support Services.

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.

 

Jumpy markets

 Monday, 21 January 2008. Posted by Leo. Filed under Support Services.

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.

 

Hawkpoint’s year

 . Posted by Leo. Filed under Support Services.

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 stockmarket and the economy

 Thursday, 17 January 2008. Posted by Leo. Filed under Support Services.

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.

 

Share tipping

 Friday, 11 January 2008. Posted by Leo. Filed under Support Services.

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.

 

When to buy and when to sell

 Wednesday, 9 January 2008. Posted by Leo. Filed under Support Services.

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.

 

How things change

 Tuesday, 8 January 2008. Posted by Leo. Filed under Support Services.

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.

 

Happy New Year, I think

 Thursday, 3 January 2008. Posted by Leo. Filed under Support Services.

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

 Friday, 21 December 2007. Posted by Leo. Filed under Support Services.

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.

 

When a new strategy might not be enough

 . Posted by Leo. Filed under Support Services.

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.

 

One degree of separation

 Wednesday, 19 December 2007. Posted by Leo. Filed under Support Services.

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:

M&A in the sector is hotting up.

 

A full week

 Thursday, 13 December 2007. Posted by Leo. Filed under Support Services.

Here is what Northgate Information Solution’s week has looked like, so far:

It’s only Thursday now, and the shares are about where they were three days ago, but it’s been a full week.

 

VT’s cunning plan

 Wednesday, 12 December 2007. Posted by Leo. Filed under Support Services.

Maybe it was the presence of Baldrick on the next table, but something occurred to me over my rosemary-salted cod at lunch. VT’s cunning plan to transform itself into a support services player looks like it might just work.

In the past we’ve occasionally been a little sniffy about VT’s strategy - it’s all there on the website, if you want to search and embarrass us - comparing Simon Tarrant’s slideware to Babcock’s superior performance. Gordon Campbell added Turner, Peterhouse, SGI and Hunting in three years from 2001 transforming his business into a genuine support services player. At the time, VT was still explaining the links between defence engineering and LEA outsourcing…

But in this last year VT’s plan is starting to become clearer and its future looks the rosier.

Babcock must now work out what to do with its rail maintenance business; Devonport looks a neat financial deal, but is a strategic u-turn. By contrast, Paul Lester can contemplate cashing in his ticket out of shipbuilding (the BAe JV) to concentrate on a foothold in waste (Wakefield), a much better US business (Milcom and AEPCO) and, possibly, a delayed move into the nuclear sector. There are also some big defence outsourcing deals lined up, as well as the continued success of the Lex deal.

All this has left VT looking nicely balanced and coherent. There’s still that tricky position in education, but I’d rather be in VT’s shoes than Babcock’s. Baldrick’s plans, if I remember right, rarely worked out this well.

 

Did Carillion overpay?

 Tuesday, 11 December 2007. Posted by Leo. Filed under Support Services.

First note that Carillion’s record is good and it can put the lessons of its Mowlem integration to good use in driving synergies out of McAlpine.

Besides, the industry needs consolidation - we’ve said that so many times that it’s not even worth linking to it anymore - so we wish John McDonagh all the best.

That’s a defence of Carillion based on strategy - we’re strategy consultants, after all - but what about value. Is McAlpine worth £572m? That’s where we give up.

Here’s McAlpine’s operating profit record over the last seven years, starting 2000: £13m, £18m, £38m, £5m, £43m, £32m, £9m. It’s hard to pick a trend out of that. And truth to tell, if Carillion can only avoid McAlpine’s repeated hiccups, then the future looks brighter.

 

Looking glass economics

 Wednesday, 28 November 2007. Posted by Leo. Filed under Support Services.

Atkins has had some positive coverage in the press today. ‘Buyback marks shift in fortune for WS Atkins’, says the FT.

We like this company and have remarked often on its merits before. But there’s a funny piece of logic in Atkins’ justification for its £100m buyback.

‘Robert MaCleod, finance director, said a number of factors had prompted the share buyback. These included…elimination of risk from the failure of Metronet [our italics].’

Did we read that right? The risk in Metronet wasn’t eliminated, it crystallised. And whatever cushion had been on the balance sheet for its failure hasn’t been freed up; it’s been used up!

Surely, the real answer is that Atkins is making buckets of money and that the market increasingly appreciates that short-term project fees needn’t mean low quality earnings. This is the real bull case for Atkins. Management should have the courage to tell it.

 

Comparing Jarvis and MITIE

 Tuesday, 27 November 2007. Posted by Leo. Filed under Support Services.

Both produced half-year results this week. Both have new-ish chief execs (Richard Entwistle and Ruby McGregor-Smith). But it’s hardly a fair fight: Jarvis is a stockmarket dog and MITIE a darling. Why?

In one sense, it’s obvious. The two sets of figures are chalk and cheese. Jarvis reported falling sales (-5%), a small loss (£0.6m) and a dangerous load of debt (£41m; about the same as its market cap). MITIE pushed revenue ahead 17% and margins up from 4.8% to 5.1%, so earnings grew 24%. Its shares, always good performers are up another 20% in the last year; Jarvis’ aren’t.

But in another sense, something strange is going on. Credo cares about strategy and, to our eyes, Jarvis has the clearer sense of purpose. ‘Rail, Plant and Freight’ is a simple and coherent positioning. MITIE’s report is gunked up with modish talk of partnership and passion, but gives little sense that management have thought through (properly) what the company stands for or where it’s heading.

So which company do we prefer? MITIE obviously! We’ve said this again and again, some companies are just better than others. And MITIE’s advantage runs deep. Some temporary confusion at the top can’t obscure this, at least not for a long while.

 

That’s the way it goes

 Wednesday, 21 November 2007. Posted by Leo. Filed under Support Services.

Neil Bellis and his sister-in-law, Lucy Cummings, the founders of Erinaceous, have finally left the company. Erinaceous faces administration, its staff are deserting to rivals and there are allegation of fraud. Bellis and Cummings receive a pay-off of £730,000.

Ferrovial, the heavily-indebted Spanish builder saw its shares rise 7% yesterday. In the midst of a global credit crunch you might have expected it to be suffering after having paid so handsomely for BAA, the operator of Heathrow. But no, the regulator has just awarded the airport group an increase of 16% in its landing charges. The hope is that this will reduce queues; it’s certain to boost profits.

 

Balfour Beatty’s Trading Statement

 Friday, 16 November 2007. Posted by Leo. Filed under Support Services.

We enjoyed Balfour Beatty’s trading statement on Wednesday. The City enjoyed it even more and marked the shares up nearly 30p (+7%) in the day.

Good news is always welcome but, on its own, not enough: people want to know, why? Why such a jump? What does the City know? Here are some of the theories we’ve heard:

 

Strategy and Support Services

 Tuesday, 13 November 2007. Posted by Leo. Filed under Support Services.

Support Services is a growing market, supporting by positive fundamentals. Companies with good managements have grown and prospered.

A good example is Babcock, whose shares are up 44p today on the back of interim profits ahead 43%. It’s a £1bn+ company, unrecognisable from the slightly second-tier defence engineer of just ten years ago. We like and admire this business.

But support services is also large, varied and maddeningly difficult to define. So for all Babcock’s success it comes across as groping for a way to explain it. Take this not-so-succinct line from its latest results:

“Babcock’s strategy is to identify and participate as a leading player in markets
with large ‘mission critical’ assets requiring long-term significant investment
programmes for their maintenance and upgrade”.

Truth is, Babcock has bought well and often, managed to avoid obvious errors and rode a wave of demand which has touched most parts of the market. Good for them: good results are worth more than elegant copy.

 

Carillion refuses to round up

 Tuesday, 6 November 2007. Posted by Leo. Filed under Support Services.

What price Alfred McAlpine? £599.6m.

When Mowlem learnt that the price of its mis-management was to succumb to John McDonagh’s embrace, by chance I found myself in a churchyard in Dorset, where old John Mowlem’s mausoleum stands. That prompted thoughts on life’s transience. I didn’t blog it - we’re not given to pathos at Credo.

As Alfred McAlpine, wherever he lies, faces the eclipse of his famous name, I’m left wondering… couldn’t the Wolverhampton lot have found another £400k? Sticking at £599.6m sends a message. We can only guess what it is.

 

Having your cake and eating it, the McKinsey way

 Tuesday, 30 October 2007. Posted by Leo. Filed under Support Services.

We’ve been complimentary about Ian Davis, the head of McKinsey, in our publications before. But times change, and being a cricket-loving PPE graduate shouldn’t exempt a man from criticism forever.

The Times carried an article by Mr Davis yesterday that managed to be both meaninglessly on-message [’Meeting the coming public sector crisis will require the engagement of a broad range of stakeholders’] yet hilariously succinct in its undergraduate certainties [’The primary challenges governments are facing today are two-fold: globalisation and demography’].

But what really grates is the sense that McKinsey, which increasingly seems to us to have been co-opted in the UK by the public sector consulting gold-rush, wants to both claim the moral high ground as well as its fat fees. ‘The challenges facing the public sector’, ran the headline, ‘involve us all.’ Some more than others, chum.

On a day when other parts of the newspaper were carrying articles about the dangerous underfunding of the armed forces abroad and the risible productivity performance of acute care in hospitals, a little less preaching from the MOD and NHS’s favourite consultancy wouldn’t have gone amiss.

 

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