Is it Time to Buy the Outsourcers - Capita, Mitie, Interserve?
By Lucian Miers | Tuesday 6 February 2018
Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
One of Warren Buffett’s favourite maxims is to be greedy when others are fearful and fearful when others are greedy.
Given Friday’s sell off on Wall St. it should be stressed that we are still very much be in fearful stage. That one financial bulletin should trumpet with a hint of panic that this was the biggest one day sell off since November 2016 (scarcely a year ago) shows that so far this is a tiny aberration. The time for greedy is when we are talking twenty or thirty years or even the daddy of them all: “since the war”. I was thinking more of the toxic outsourcing sector where, since the Carillion debacle, the market really has turned fearful, and the contrarian might rightly look to be greedy. So, is it time to buy Capita (CPI), Interserve (IRV) and Mitie (MTO)?
It is tempting, but in my opinion the answer is still no. It looks like the sector is in run off with everyone trying to sell assets at the same time to reduce debt and downsize. Also, where pension fund deficits were pretty much disregarded until recently, they are now in the spotlight.
Of the disposals that Capita has pledged to make the two named, Parkingeye and Constructionline, are unlikely to make much of a dent in the debt and until the terms of the rescue rights issue are announced it looks best to stay away.
Mitie’s shares have fallen 25% since we bears tipped them as a sell at last year’s UK Investor Show. Given that since then there has been a further profit warning, a restatement of the accounts, an investigation into the auditing of the accounts and a failure to sell its property management division that is a muted response. Although Mitie’s debt looks the most manageable of the trio, it is the quality of the receivables that has always been the concern here. I believe it has further to fall and remain short.
Interserve looks the most vulnerable. It’s banking covenant tests have been delayed until March and its market cap to debt ratio is beginning to resemble that of Carillion. Bargain hunters here should sit on their hands.
So for the time being it looks to pay to follow the herd with this sector and not to try any contrarian heroics. Lastly, I note that bungling BNN Technology (BNN), which I covered extensively last year, has until Friday to find a NOMAD or be delisted. It is leaving it a bit late.
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