Support services’ chief executives cannot open their mouths without investors fretting whether they are the next Carillion, defunct after being liquidated, or Interserve, fighting on after a pre-pack administration.
Mitie yesterday briefed the City on its situation prior to the end of its financial year. The figures appeared sound enough. However, the shares took a bit of a smashing, closing down 7.2 per cent, or 10¾p, at 139¼p.
Irrespective of Mitie’s financials, two things, inextricably intertwined, are at play. The shares have run up at a lick these past three months. That means that, prior to yesterday, any investor brave or lucky enough to have got in at the low of 105¾p at the turn of the year would have been sitting on a 42 per cent paper profit. It could be argued that yesterday saw some old-fashioned profit-taking.
That is to ignore just who is interested in Mitie’s shares. When Mitie was at its shakiest, after the 2016 departure of the chief executive Baroness McGregor-Smith, 14 per cent of the stock was being played with by hedge funds, the short-sellers who bet on a fall in a share price.
In recent months, with Carillion out of the picture and Interserve’s shares so low they were out of play, the shorters have returned and hold near 6 per cent of the company’s stock. Interestingly, leading those Mitie short-sellers is Coltrane Asset Management, a New York hedge fund run by a former UK investment banker, Mandeep Manku, which has form in this sector. It made money from the demise of Carillion but lost a bet that Interserve would be saved from administration. Coltrane also has a stake in Capita.
This raises questions that a parliamentary select committee would do well to consider. There is an argument, from MPs on both sides of the Commons, about whether public services should be outsourced to private companies. The debate is sharpened by the high-profile financial issues across the sector and big players like Serco and Capita having to launch rescue rights issues. Kier, with its botched fundraiser last December, is just the latest to come into the spotlight.
The smarter question might be not whether we agree with privatisation but whether these public services are safe in the hands of listed companies that can become the playthings of casino investors, hedge funds more interested in returns for their high-net worth backers than the people the businesses are supposed to serve.
Mitie is a £2.2 billion a year turnover company that employs 50,000 people, many on minimum wage, in cleaning, catering and caretaking roles. Its clients include the Co-op and Rolls-Royce.
Mitie insists that it is not in the next-Carillion or Interserve league. But after its trading update the bears leapt on a couple of issues: operating profit, at between £84 million and £87 million, is a bit light on what the City hoped; and there has been a 10 per cent drop in the order book. On the latter point, bears will argue that Mitie should be literally cleaning up from the collapse of Carillion; supporters will argue it shows Mitie is being disciplined.
Ignoring external factors, Mitie would be a bet on the well-regarded turnaround chief executive Phil Bentley investing in the technology, delivering the standardised processes and service levels, and ending the silo mentality of its various businesses to drag the profit margins up to a sustainable 5 per cent.
The trouble is Mitie is wholly operational in and dependent on the UK economy, with governments and councils not spending and companies putting the brakes on investment. And that uncertain environment is the reason why those hedge funds are placing their chips.
ADVICE Avoid
WHY This is a tricky sector, with clients who aren’t spending and investors following their own agenda
Sabre Insurance
The trading environment for motor insurers is tougher than ever. Fierce competition among insurance groups has weighed on prices, keeping them relatively flat while the cost of claims has risen. There are also more claims to contend with, as payouts rose almost 30 per cent to a record last year on the back of a resurgence in car crime. The result is that insurers’ profit margins are under pressure.
Sabre Insurance, a FTSE 250 motor insurance underwriter, stands out among its competitors for taking a different approach. It has been increasing its prices in line with claims inflation on the basis that its overriding objective is to achieve strict margin targets. It has a market share of about 2 per cent but is selective in what it underwrites.
The strategy has been paying off. Sabre issued a juicy dividend of 20p per share for 2018, despite reporting a 6 per cent drop in profits before tax to £61.9 million yesterday. The fall was in line with expectations as the company experienced no top-line growth and looked to prioritise profit margin over increasing income.
The strategy makes it a more complex picture for investors, however. As a small and focused insurer, without the baggage of its larger peers, it is an attractive stock. Its share price in the 15 months since it listed in London has shown growth of about 25 per cent, from 230p at float to 286p yesterday. Analysts at Numis and Canaccord have set a price target of 310p, while Barclays is a little more cautious at 296p. Sabre has a solvency capital ratio of 213 per cent, well ahead of its target range, which allowed it to pay the dividend.
However, on a call with analysts, Sabre’s management sounded cautious. The take from analysts was that Sabre is waiting for other companies in the sector to start raising prices to reflect claims inflation, at which point Sabre will start to develop the business. That movement, which could be 18 months away, needs to take place before Sabre becomes a serious growth prospect.
Until then, the dividend has set a positive tone and the option for more interesting growth if, or when, insurance prices start to rise makes Sabre an investable proposition.
ADVICE Buy
WHY A shift in the market could mean growth for this focused player long term
