20 November 2008
by Graeme Davies
After much conjecture in recent weeks about the resilience of the FM and general outsourcing sector, the past fortnight has brought mixed messages from four different players about the state of the sector. Trading updates and results announcements from the likes of Spice, Mears, Rok and Shanks have left sector watchers none the wiser about the near term as we head into what many are predicting could be a rather severe economic downturn.
What the mixed trading statements do confirm is that there will be winners and losers out of the current situation, and those best placed to benefit will be those who had the foresight to see the problems coming and adjusted their business plans accordingly rather than those who are trying to react now when it simply appears too late to do so without incurring some pain.
But discrepancies remain within sub-sectors of the economy. Social housing, for example, has proved to be a boon for Mears but a pain for Rok. Mears, which specialises in providing long term maintenance services to social housing landlords boasted of ‘increased opportunities’ and said it had won £230 million of new contracts since the beginning of July and talked of a strong pipeline of opportunities.
In contrast, Rok, which specialises in maintenance and building services, saw its share price hammered when it said projects worth £150 million had been cancelled or deferred since July. In total, 50 of its projects have been affected, of which £27 million worth are related to social housing refurbishment and social housing new build. This suggests not all is well in the social housing sector despite hopes that continued, and in some areas increased, government spending would support the sector. Rok is reacting by slashing jobs and refocusing on repairs, maintenance and refurbishment – areas in which the likes of Mears are already dominant.
Meanwhile Spice, which specialises in FM and utilities services, did warn of ‘softness within some areas of the group’s facilities businesses’ but said strong growth in its utilities services business would outweigh any slowdown elsewhere. In recent months it has won contracts for the likes of Yorkshire Water, South East Water and Transport for London for grounds maintenance, tunnel maintenance and meter reading services, proving that diversification can help to mitigate the downturn to a certain extent.
Concerns about the potential drying up of private sector funding of ongoing Private Finance Initiative projects was partly allayed by comments from Tom Drury, the chief executive of waste management business Shanks. He said bank funding was still available for ‘mid-range’ projects in the £50 million-£100 million range. Beyond that level funding may be more difficult to find and this could have serious consequences should the credit freeze continue indefinitely. There may be some hope that the dramatic 1.5 per cent cut in interest rates announced by the Bank of England will ease this but the crucial inter-bank lending market rates, at which banks lend to each other, remain well above this level and until banking confidence returns then funding for even the safest perceived projects will remain tough to come by. Until that happens, government plans to pump massive extra sums into PFI deals may hit a brick wall in terms of the private sector finding the funding to fulfil their part of the deals.
Graeme Davies writes for Investors Chronicle
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