Martin Flanagan: How the Mitie outsourcing sector has fallen

One gets used to the stock market swings-and-roundabouts of sectors that come off the boil at various times and for various reasons.

Mitie's clients include the Scottish Parliament. Picture: Jayne Wright

The likes of retail, defence, telecoms, engineering and oil all come to mind. Strong performances and setbacks alternate and unpredictability is taken as part of the equation for investors. But outsourced services has enjoyed something of the dependability in the City’s eyes as, say utilities, with a steady-as-she-goes performance usually anticipated by the markets.

It is rarely shoot-your-lights-out, but neither do there tend to be major bumps in the road as many companies in many industries outsource so they can focus on their core operations.

That is why Mitie Group’s profits warning yesterday, speaking of interim earnings coming in “materially below” expectations, was such a shock to the system. Nearly 30 per cent was slashed off its value.

It is surprising though that it has taken this amount of time for outsourcing to show feet of clay. Mitie, like many of its rivals, is heavily dependent on the public sector, even though it has some prestigious private sector contracts.

We have had years of austerity in that public sector. Financially stretched councils are looking at every outsourced penny for value for money, with the resulting pressure on margins for the key players.

Mitie says that it has noticed over the past 18 months or so that its clients are deferring investment decisions and opting instead to renew or extend existing outsourced contracts rather than break new ground.

That has been exacerbated, says the company, by both pre- and post-Brexit vote uncertainty, and the general slowdown in the UK economy. It is true that the economy, and services in particular, has performed better than forecast by the doomsayers before the EU vote.

But it is still well down on what it was earlier in the year and that looks likely to continue as the UK’s protracted negotiations to quit the single trading bloc go on.

Discretionary spending by the clients of Mitie and its peers – the likes of Mears Group, Interserve and Carillion – is unlikely to head north amid this uncertainty and that can only mean further pressure on margins. Mitie might not be the only reality check for the sector.

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