Facilities management insights

Listed FM company share prices down in tougher H2

The share prices of our peer group of quoted companies in the facilities management (FM) sector increased by an average of just 5.9% in 2017. This compares to a 14.5% rise in the FTSE UK Support Services Index.

The second half of the year saw average FM company share prices down 7%, with a number of the larger FM PLCs facing difficulties. Increased competition, higher wages and labour shortages have put pressure on the margins of a number of listed operators. The FTSE UK Support Services Index saw a rise of 6.4% for the same period.

However, the more buoyant share performance of some listed FM players with strong order books and recurring revenue streams demonstrates the relative resilience of the sector in comparison to other sectors in the face of weak consumer spending. 

The sector’s listed companies with operations focused primarily on the UK market saw mixed results. The strongest share price performers were Premier Technology Services, Bilby and Johnson Service Group, while Carillion, Interserve, Kier and Mitie saw significant declines. Companies with greater exposure to overseas markets, such as Rentokil Initial, G4S and Balfour Beatty, generally saw share price gains, with the notable exception of Serco. In part, the share price gains of globally diversified operators will be attributable to the forex gains on overseas revenues as a result of the devaluation of sterling.

Main winners 

The biggest winner of 2017 in share price terms was Premier Technology Services, which saw an increase of 47.9%in H2 2017, bringing total share price gains for the year to 123.5%. Interim results in 2017 showed record turnover and adjusted operating profit growth of 20% to £4.4 million. The company had strong contract wins, acquired several businesses throughout 2017 and says it is undergoing a reorganisation to better align with customers' needs and industry demands.1

Shares in AIM-listed Bilby were up 51% in H2 and a whopping 78% for the year. The company’s interim report, released in November, said it had seen record revenues as a result of strong trading and winning a number of major new contracts”. Net debt was £5.99 million at the end of September, with visible future revenues in excess of £320 million.

Rentokil Initial shares were up 17.3%in H2 2017 and 43.1% at the end of 2017.The company announced a joint venture with PCI of India in Q1 2017 to create the largest pest control company in India. It acquired more than 30 companies throughout the year, sold off eight flat linen laundries in France and was awarded The Queen's Award for Enterprise 2017.Ongoing revenue increased by 13.7% in Q3.2

Shares in work wear laundry firm Johnson Service Group were up 25.5% in 2017, with a rise of 11.6%in H2. Strong results for the first six months of the year saw revenues up 19.3% year-on-year to £138 million. The £8.25 million sale of drycleaner Johnson to Timpson's helped boost pre-tax profits for the same period to £12.9 million. Successful acquisitions and strong second half trading are expected to deliver full-year results “slightly ahead” of management expectations.3

Security specialist GS4’s shares were down 18.3%in H2 2017, leaving it with a net gain of 13.6% based on improving performance in emerging markets and an acceleration of contract wins for its Cash 360 automated cash handling product. A November sales warning followed controversy over its Home Office contracts and alleged detainee abuse at two of its UK immigrant centres.4

Balfour Beatty’s shares were up 10.4% by the end of 2017, with the majority of the gain coming in the second half of the year. It returned to profit in March 2017 and landed contracts for HS2, the Thames Tideway Tunnel and several projects in the US. In the six months to June it reported revenues up 5.7% to £4.2 billion, with pre-tax profit of £12 million. This compares with a £15 million loss in the previous year. Net debt fell 38% to £232 million.5

Shares in Lakehouse were down 13.9% in H2, leaving it with an overall gain for 2017 of 6.8%. The company’s pre-tax £1 million loss in 2017 was a significant improvement on a £36 million loss in 2016. Focusing on its core activities, compliance revenues were up 15% and energy services revenues up 30%. Construction revenues also grew by nearly a fifth, albeit from a low base.6

Compass Group generated annual revenues of £22.6 billion in the year to 30 September 2017, yet its shares had been down 0.4%for H1. This recovered to 6.4% by the end of the year but fell again on news of the tragic death of CEO Richard Cousins in a plane accident on New Year's Eve. Successor Dominic Blakemore's appointment was moved forward following Cousins’ untimely death.7

The price of shares in fire protection equipment company London Security were largely unchanged in H2, but up 5% for the year. A half-year report in September 2017 said revenue increased by £4.3 million (7.6%) to £60.6 million. Operating profit increased by £0.2 million (2.2%) to £9.5 million and the company said integration of six acquired businesses was progressing well.8

Main losers

Carillion’s share price valuation plummeted by 90.8%in H2 2017 to end the year down 92.7%. The company continued to win government contracts last year even as it issued profit warnings and its market capitalisation fell from £2 billion in 2016 to just £61 million before its liquidation in January with just £29 million cash and more than £1.5 billion of debt, in the largest financial collapse the sector has ever seen.9

Interserve’s shares price ended the year down 72.1%, with a 60% fall in H2 after it issued profit warnings in September and October last year when it ran into difficulty on a number of waste-to-energy contracts. It had net debts of about £513 million at the end of 2017. The company said it expected operating profit in 2018 to be better than analyst forecasts.10

Shares in Mitie were down 29.7% for the second half of 2017 to end the year with a drop of 13.9% as it swung from a £75.7 million profit in 2016 to a £184 million loss in 2017. The company revealed in August that it was being investigated by the FCA over the timing of its profit warnings in 2016 and in December announced it had aborted the planned sale of its property management business. A restructuring plan under former British Gas boss Phil Bentley is under way and underlying performance is said to be recovering.11

Kier Group said it was on track to deliver double-digit profit growth for 2017 but net debt for the year was expected to be £230-240 million, including the debt of recently acquired infrastructure services provider McNicholas. Shares were down 11.5%in H2 and 20.8% for the year. Kier has assumed Carillion’s responsibilities for HS2 and smart motorways contracts and says its order book “remains strong”.12

Shares in Serco Group were down 11.7% in H2 2017, leaving it with a total fall of 31% at the year end. In September 2017, Serco announced that it would be combining its UK and Europe operations as part of chief executive Rupert Soames’ five-year strategy to transform the firm after a number of rocky years. Pre-tax profits fell almost 37% but its order book was boosted by a £1.5 billion contract to operate a new prison in Australia.13

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

References

  1. Euroinvestor.com, September 2017
  2. Financial Times, October 2017
  3. The Telegraph, 4 September 2017
  4. Financial Times, December 2017
  5. The Telegraph, 29 December 2017
  6. Construction Enquirer, January 2017
  7. This is Money, February 2018
  8. London Security plc half yearly report, September 2017
  9. Financial Times, January 2018
  10. The Guardian, 17 January 2018
  11. Proactive Investors, December 2017
  12. Proactive Investors, January 2018
  13. Reuters, January 2018