Will Outsourcing Giants Take Investors To The Cleaners?

THE WEEK: Morningstar columnist Rodney Hobson explains why he’s staying clear of Capita and Mitie, despite recent share prices gains

Rodney Hobson 16 June, 2017 | 10:35AM

It’s now more than 20 years since the outsourcing craze really kicked off but investing in such services has been pretty patchy. The sector has been beset with accusation of exploiting workers and milking government contracts. It has also been competitive.

Two quite different companies, Mitie (MTO) and Capita (CPI), presented what I felt were uninspiring updates this week, but ones that were well received in the stock market. Caution is required.

Office cleaning and security contractor Mitie plunged to a £43 million loss in the year to 31 March, and while that was partly down to write-offs you should not ignore the 14% fall in operating profits on a like-for-like basis. The final dividend was scrapped and the current year’s payout will be rebased to 4p compared with 12p in 2015-16.

This was admittedly not a complete surprise, as Mitie issued a profit warning last September, but the shares had already staged an impressive recovery after initially plunging 30% on that warning. Investors were impressed that chief executive Phil Bentley bought £3.6 million worth of shares when he took over at the end of 2016 and they clearly like his cost cutting plans.

The shares leapt 33p to 280p on the figures and are back to where they were a year ago. That is taking an awful lot on trust, especially as Mitie is the type of company that is hit hard by any increase in the minimum wage.

A day later Capita shares surged 15% after also claiming good progress on its turnaround plan following three profit warnings last year.

Capita can claim to have secured £318 million in major new contacts but this was tarnished by a warning that changes to an existing contract with the Ministry of Defence could make the deal less profitable and could lead to early termination. It’s more important to keep contracts rather than go to the trouble and expense of winning new ones.

However, apart from an assurance that profitability is expected to improve in the second half of the year to next March, I find nothing inspiring in the AGM statement. The best that can be said of the first half is that it will be no worse than last year.

If you are interested in either company, wait and see if the shares fall back before buying. For my part, I’ll give them a miss. 

More Bad News For DFS

I often chastise companies that are mealy mouthed about bad news so I have a few words of respect for furniture retailer DFS (DFS) for being quite clear that it was issuing a profit warning. This news was particularly disappointing because DFS has kept sales and profits rolling quite well over the past few years.

The shares immediately slumped 20% to around 200p but that still left them higher than the 186p they hit immediately after last June’s Referendum. One profit warning tends to be followed by another, and the company’s contention that the whole furniture market is suffering is ominous. One the other hand, DFS is a great survivor. The shares are strictly for high risk investors and have no place in my safety-first portfolio but good luck if you fancy a punt.

Buying Opportunities in Mid-Cap Market

I tend to invest in solid, international companies listed in London – though I do indulge in the occasional piece of excitement – so I have a minimal commitment to stocks in the FTSE 250 index. Those who do go for the midcaps have seen all the best buying opportunities in the wake of the general election.

At times like this it is important to hold your nerve and to buy on the dips. Volatility is an ally, not an enemy. 

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Capita PLC123.65 GBX-2.14-
DFS Furniture PLC223.00 GBX-4.29-
MITIE Group PLC143.70 GBX-0.90-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.