Outsourcing firms and insurers may find opportunity in the government’s fiscal crisis
It’s an ill wind that blows no good and, counterintuitively, some companies could benefit from next week’s government belt-tightening. Despite fears that spending cuts may stall fragile economic recovery, firms which provide services more cheaply than the public sector may enjoy increased turnover and profits.
Outsourcing companies ensure that light bulbs are replaced and loo rolls supplied, among a wide range of other ‘facilities management’ services, without the need to provide expensive final salary-based pensions and other benefits for staff. Whatever you think of the ethics involved, it’s no wonder a report by DeAnne Julius, a former member of the Bank of England’s Monetary Policy Committee, found that outsourcing could deliver vital services for 30 per cent less than public sector employees can.
Firms in this space such as Capita, Carillion, Interserve and Serco have long been regarded as ‘Cinderella stocks’ — a largely overlooked corner of the support services sector. Capita and Serco enjoyed a partial re-rating recently but continue to be tipped by the stockbrokers Killik & Co, while Carillion and Interserve offer greater prospects for investors willing to accept more risk.
Of the two, Carillion looks the more likely share to enjoy revaluation: nearly half of its profits came from outsourcing last year. The company provides facilities management for the whole of HM Revenue & Customs’ estate, for 43,000 Ministry of Defence military homes and more NHS hospitals than any other company. It also delivers support services for roughly 10 per cent of the motorway and trunk road network for the Highways Agency, usually under seven-year contracts. Whatever happens in the wider economy, this kind of unglamorous work will still have to be done. Carillion’s track record of cutting costs by a third will make it an attractive candidate for extra commissions from government departments keen to reduce costs further.
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