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21 October 2019
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outsourcing's outs offer new ways in

Graham Davies
Graeme Davies writes for Investors Chronicle

5 August 2019 | Graeme Davies


Graeme Davies gives his views on outsourcing this month.


The FM sector has pretty much existed in a state of permanent flux for the past five years as major players have stumbled upon harder times and smaller upstarts have surged up to take advantage before, in some cases, crashing and burning. Some would say ‘’twas ever thus’ but the recent past has been littered with significant casualties than ever before. 


Now Kier Group has thrown in the towel, announcing its decision to pull out of the FM market in June after management decided to concentrate on construction. A strategic review by CEO Andrew Davies to steer the business away from a cash crisis such as that which engulfed Carillion and nearly drowned Interserve concluded that Kier would be best off selling its property, FM and environmental services businesses and concentrating on cash generation in its core business. The irony here is that many of the businesses being jettisoned now were brought into the fold through the acquisition of May Gurney in 2013 as construction businesses looked to build out full service operations to take advantage of the trend towards outsourcing of public sector services. 


News of Kier’s withdrawal from parts of the market was swiftly followed by yet more disappointment for the outsourcing sector, as Costain sent a warning to investors about profits owing to late starts on some contracts. 


But Kier’s exit from the FM sector, coupled with the woes of its peers, creates opportunities for others. Witness the recent expansion into the sector by Wates, the venerable 120-year-old family company with roots in construction and housebuilding. It recently announced the launch of Wates Facilities Management, building on its successful Wates Smartspace FM business. The firm already has 85 clients in 14 sectors and a combined turnover of £400 million. 


The fact that it is still a private business will allow Wates to build up its FM operations away from the glare of public ownership and the extra pressure that can place on companies to continue seeking out growth almost at any cost and to live up to expectations in terms of dividend payments that may become unrealistic. Wates has a solid base from which to grow in the sector; in 2018 it posted a turnover of £1.6 billion and cash earnings of £48m, up modestly on the previous year. Importantly, the company ended 2018 with £112m in the bank and a record order book of £5.4bn. The test for its management will be to remain disciplined in its growth plans and to maintain its financial prudence. 


With a family legacy to protect and without the competing demands of public ownership it has a decent shot at achieving this.


Graeme Davies writes for Investors Chronicle