It is not entirely clear why Interserve should have chosen to put its equipment services division up for sale in February. RMD Kwikform, which dates back to the old RM Douglas construction group, seems like the best performer among Interserve’s three divisions, having delivered an 8 per cent return over the past 15 years, with margins in excess of 20 per cent and providing a third of the group’s profits.
It was not exactly up for sale but was the subject of a “strategic review”, which plainly asks potential buyers to form an orderly queue. No good enough offer was forthcoming, one must assume, since the board of Interserve has taken the view that the company remains the best owner for the business.
Instead, action is being taken to make it more attractive. It is a highly capital-intensive operation, providing support structures while buildings are being put up. The asking price, £300 million according to some estimates, would have wiped out Interserve’s debt. Instead, redeployment of some assets will cut £5 million off the amount of capital tied up, while restructuring will enhance profits by £1 million a year. This will involve a £17 million charge, of which £5 million in cash will be incurred over the next year.
Plainly, a lot has happened to Interserve since February and the decision to hold on to RMD Kwikform must be part and parcel of this. The construction side was hit by a £70 million hit from a contract to build a waste to energy plant for Viridor in Glasgow. The climate since the referendum has become less attractive for outsourcers such as Interserve, while the national living wage will have hit margins across the sector, as shown by the troubles of Mitie and others.
RMD Kwikform gets four fifths of revenues overseas, in areas such as the Middle East, and such diversification outside the UK is plainly more attractive now. It is by no means clear how, had a decent enough offer emerged, Interserve could have reinvested the money and achieved a similar return.
Interserve shares, off 4¾p at 350½p are a long way from their level at the start of the year. They sell on little more than five times earnings and yield more than 7 per cent. That suggests the fall has gone too far.
My advice Buy
Why The bad news looks to be out of the way for now. The decision to retain equipment services looks like a sensible one
Mitie
Mitie has a strong core business in facilities management and has just won its biggest contract in security, with a large unnamed retailer. Still, I would not be buying the shares in the immediate future, though up 5p at 199p they trade on less than ten times earnings and, superficially, look cheap.
Phil Bentley, the new chief executive, arrives in December and will need to take three key decisions. Plainly, he will have some input into the halfway numbers that are out on November 21 and those decisions may even be made then. They are the review of the healthcare business, which is losing about £4 million a year, the dividend policy and whether to continue with the £20 million share buyback, now about halfway through.
A writedown of some or all of the £111 million spent on Enara, which took Mitie into the provision of healthcare in 2012, looks to be on the cards. A cut in the dividend looks likely, given last month’s profit warning. A new chief executive would have carte blanche to reset the payment in accordance with those expected lower earnings. The suspension of the share buyback would be mere collateral damage.
For much of the past year the shares were trading in the 300p area. Mitie is not the only outsourcer to be hit with headwinds from the uncertain economic environment and there seems to be no reason why they should not regain that 300p level in due course. Still, there looks to be further turbulence ahead as those hard decisions are taken.
My advice Avoid
Why There looks to be further bad news to come
YouGov
Most probably still think of YouGov as a producer of opinion polls, one that didn’t exactly cover itself in glory in its forecasts for the Brexit referendum. In fact, YouGov is increasingly providing market research data for corporate clients, such as the big names in Silicon Valley, providing details on spending habits, website activity and the like. The best comparison is probably Thomson Reuters.
The company has set itself some ambitious targets to triple profits over a five-year period to 2019. This seems achievable: YouGov raised revenues from data products and services by 32 per cent in the year to the end of July and this now accounts for amost two fifths of the total. Take out favourable exchange rate movements (YouGov’s biggest market is the United States) and organic revenue growth came in 12 per cent higher in the financial year.
This is a growth stock, the dividend yield being negligible, and the multiple on the shares, about 23 times this year’s earnings after an 7½p rise to 220½p, reflects this. The long-term strategy is there, but that price looks a high one.
My advice Avoid
Why Share price rating seems full enough
And finally...
The consolidation in the European packaging industry, which is being led by the London-quoted RPC Group, DS Smith and Mondi, continues, with all three having a good record for picking up useful acquisitions that enhance margins. The latest deal is by Mondi. It is paying €41 million for Beepack, which makes corrugated packaging at a plant 400km south of Moscow. I have tipped the shares in the past. As most earnings come from outside the UK, they have done well enough since the summer.
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