Facilities management

Facilities management company valuations holding up

Usman Malik Usman Malik

A relatively strong second quarter saw the share prices of our peer group of quoted facilities management (FM) companies increase by an average of 13.5% in the period to 30 June 2017. Valuation multiples are also showing a positive trend.

The average share price of FM quoted companies was up nearly 20% at the end of the second quarter compared to the same time last year. This was ahead of the increase in the FTSE Support Services Index for the same period.

FM company share prices took a battering in the immediate aftermath of the EU referendum in June last year. They recovered strongly in the third quarter before settling down in the six months to 31 March 2017.

Our analysis of the valuation multiple of these listed FM companies  demonstrates the resilience of the sector since the EU referendum in the face of a more challenging economic environment.  Average enterprise value to EBITDA multiples have fluctuated in the 8x to 10x range between Q2 2106 and Q2 2017 on a last-twelve-months basis, reaching a peak of 10.1x in Q1 2017.

Investor confidence

A year on from the referendum investors are showing continued faith in the visibility of earnings and strong order books of the FM sector. This is in stark contrast to their apparent lack of interest in consumer goods businesses in the face of weak UK consumer spending and falling real wages.

There has been little in recent economic indicators to encourage investors to change course from this essentially defensive investment strategy in relatively safe and stable businesses.

At the same time, there remains a good degree of volatility in the market. This is attributable mainly to internal issues at a number of quoted companies reflecting their own particular challenges, rather than indicating of a wider trend.

Winners and losers

Shares in Bilby were up 86% for the second quarter, but from a low base. This followed a slump in H2 2016 on the back of profit warnings, leaving the share price down 42% for the year to 30 June. The group says it made considerable progress in the six months to March 2017, benefitting from its buy and build growth strategy and the successful integration of DCB and Spokemead into the group.

The other big winner in Q2 was Berensden. Its share price increased 68%, leaving it flat for the year to 30 June, on news of Elis’ revised £2.1 billion offer for the linen and textiles hygiene company, valuing it at 7.6x adjusted EBITDA after a drawn out acquisition process. (See our review of M&A activity in this issue.)  Berendsen’s share price had plummeted by 46% between July last year and March this year following profit warnings.

Mitie’s share price has been fluctuating significantly since it announced losses resulting from a major accounting adjustment on its contractual positions. But the second quarter saw its share price rebound by 25%. The company has embarked on a major cost-cutting programme to stem losses.

Carillion, which has also suffered from accounting issues, saw its share price fall 16% in Q2, leaving it 20% down on the year to 30 June 2017.

Interserve saw a modest increase in its share price of 4%, although it is 11% down for the year. The group won some major contracts last year, including a place on Gatwick Airport’s construction framework and a £200 million redevelopment for the Ministry of Defence, but has been hit by some loss-making projects in recent years.

Aim-quoted building service provider Lakehouse, which has been in the news because of its involvement in testing the alarms at Grenfell Tower, saw its share price drop 12% in Q2 following interim results that showed falling sales and earnings.

If you would like to get in touch with us to discuss these developments in more detail please contact Usman Malik.