Trends in outsourcing and contract length are key defences in 2009

 

By Graeme Davies

15 January 2009

The economic outlook is becoming increasingly bleak with expectations for 2009 looking particularly dire. But across the FM sector there are some signs of resilience from most players, helped by long-term contracts and the continued trend towards outsourcing benefiting the stronger players in the business.

Results and trading statements in the last few weeks of 2008 suggested some companies are faring reasonably well and could prove to be good defensive bets during what promises to be a tough year ahead. Diversity in service provision appears to be the key, this way companies can shift focus and reallocate resources within their own businesses. Alternatively, companies with strong balance sheets and cash available are likely to bolster their weaker spots with acquisitions.

This was illustrated just before Christmas when Spice Group, the utilities services and FM business, used some of the £50 million it raised from investors earlier in 2008 to acquire the National Industry Fuel Efficiency Service, a provider of consultancy and design services on environmental issues. The acquisition came just days after Spice had issued relatively resilient results across its range of businesses, most of which provide services to utility companies. Spice did admit to some weakness in its FM operations although chief executive Simon Rigby said the company was busier than ever in FM. But sales cycles were lengthening and the contract values were generally lower.

Also in December, Connaught reassured its investors that business continued to be resilient, particularly its social housing repair and maintenance operations. Some commentators have expressed concern that social landlords may be struggling but this appears to be pushing them into the arms of outsourcers such as Connaught which can offer them a more integrated and complete service. This has helped Connaught to secure a total of £320 million worth of new contracts since September alone.

So diversity and balance sheet strength are likely to be the most important factors for companies looking to survive, and maybe even prosper in 2009. But diversity in terms of geographical spread could also prove to be a millstone for companies who earn significant amounts overseas. The recent dramatic deterioration in the value of sterling could weigh on performance when revenues earned in both Europe and the US are translated back to sterling. It also makes the prospect of expanding overseas through acquisitions increasingly expensive and unlikely, especially with UK government policy likely to see sterling weaken even further. In contrast UK companies could increasingly become attractive to European or US FM operators looking to grab a slice of the UK market at a time when stock market valuations are low and their spending power is strong.

The year ahead promises to be eventful for the UK's FM firms. As the economic situation deteriorates it is likely they will continue to exhibit resilience when compared to the rest of the stock market.

Graeme Davies writes for Investors Chronicle