Monthly Archives: May 2016

Stocks in Focus: Interserve

This week I am looking at Interserve, the UK-based support services and construction company that operates predominantly in the UK but also has international exposure, including substantial operations in the Middle East. Having begun primarily as a construction and equipment services company, the business has gradually transitioned to focus on support services in recent years and this division now accounts for roughly 64% of operating profit.

Of late, Interserve has fallen out of favour with investors due to concerns over its exposure to the Middle East, where decreasing oil revenues seems likely to put pressure on spending budgets and the construction industry. In addition to this, management credibility has come into question following a £70m exceptional provision made on a mispriced construction contract in the UK.

Despite this setback, management continue to focus on the transition towards what is now the core part of the business – UK support services.  Drivers of this division seem favourable as more customers want to specialise in their core activities and outsource the likes of cleaning and security in order to reduce costs. With contracts lasting multiple years the business also enjoys relatively good earnings visibility. Furthermore, management have announced a strategic review of the equipment services division, which designs, builds, sells and hires specialist scaffolding equipment for major infrastructure projects. This seems likely to result in its sale and would allow management to simultaneously reduce their Middle East exposure whilst raising funds for reinvestment into the UK support services division.

Investors must consider whether the depressed valuation offers a good entry point into a business that is becoming ever more focussed on UK support services. If this transition can be successfully managed then the shares should earn a significant re-rating from their current valuation. However, investors cannot ignore the potential for deterioration in the Middle East and/or the risk of other contracts becoming unprofitable.


Brexit – Put Right the Mistake of 1054

Is there anything positive to say about the EU? Marcus Johnson admits there is a very strong case to remain in the EU but it is nuanced and complex.

When I wrote about Brexit in the April issue of Cambridge Business Magazine my friends, wife and business colleagues all accused me of being wholly negative. It is true that I concentrated on the near term certain costs to the UK and the risks to European and world peace and had nothing good to say about the regulatory mess we label Brussels. That is because, in the short term, I believe we would be poorer and the longer term risks of war are ignored at our peril. A decade of depression might lead to social unrest on a Victorian scale, and Russia would certainly take advantage of a break-up of the EU. So I make no apologies for emphasising the disturbing possible consequences of an ‘out’ vote. Likewise I make no apology for condemning the over detailed counter productive regulatory web we live within, although I have my suspicions that the regulatory burden would stay the same or worsen if we had Whitehall in sole charge.

But what, I was asked, could I say positive about remaining in? I do believe there is a strong positive case to make, but it is nuanced and complex, and involves a belief in human progress and a confidence in the system of parliamentary democracy we have evolved in the UK and now in the EU. I believe that the EU can do two hugely valuable things; one for us in the UK, the other for the world.

The reason that Oxford and Cambridge are in the top ten universities of the world has less to do with the brilliant minds who constitute these intellectual powerhouses and much more to do with the stability of the environment in which they have operated over the centuries. This has allowed academic excellence to flourish without the interruption of invasions, insurrections or dispossession.  It is not unreasonable to believe this relative stability springs from Magna Carta and the representation of all powerful interest groups in parliaments over succeeding generations. Magna Carta recognised that successful government involved an accommodation to the interests of commerce and civil society and that social order was best maintained by self restraint and a common adherence to a written system of laws and justice. This was preserved by a representative system where the most powerful were consulted and a broad consensus preserved. The interests then were Crown, Church, and Land and that has evolved over the years to Commerce, Finance, Industry, Civil Service and Unions but the same idea of putting representatives together and letting them try to create a consensus has with one or two problems along the way proved a success for the best part of a 1,000 years. This settlement is under threat today as never before in all democracies by two powerful forces. The first is an increase in the ease and speed of mass communications; this is leading to a threat to the representative system.  The ability to sample and observe public opinion on individual decisions is tending to replace informed debate by representatives with uninformed short term fashion driven popularity seeking. Referenda are one example but frequently the use of opinion polls and focus groups is replacing “what is the best solution?” by “what is the most acceptable solution?” within both the government and our political parties. The second powerful force is the creation of ever more “entitlements” by politicians seeking votes.  In a system when 300,000 people pay one third of all income tax received by HMRC it is very easy for voters to vote for benefits in the belief that someone else will pay. In a UK which had no treaty commitments to respect private property, and with borders closed to free movement of capital and people, there would be no control on such dictatorship of the majority. So the first great positive contribution the EU can offer in future years is a control over populism and over politicians using bribery to buy votes. The reason the EU offers a control is simple – as long as there is freedom of movement of people, of goods and of capital, those who suffer as a result of uncontrolled populism or electoral bribery can move their business, their capital and their home to a more congenial country and the knowledge that this could happen – or evidence it was starting to happen – would of itself offer a control over extremism of this sort. The Treaty of Rome itself provides protection for individual rights and against seizure of property in the same way which the Constitution does for the USA.

The second major positive influence of keeping the EU (and our departure would set off several others unless the nasty consequences showed themselves very fast so as to deter others from following suit) could be on the rest of Europe. In 1054 the Great Schism was the first act in 1,000 years of bitter dispute between East and West which is still going on today in the Ukraine, was recently in evidence in Bosnia and for most of the last century has regularly surfaced in hostilities between Russian and her neighbours and Turkey and her neighbours. The latter was the cause of the three Balkan wars and then the First World War and the Russia today has soldiers occupying some or all of several of her neighbours. The EU has already shown it can persuade former fascist and communist dictatorships to adopt democratic forms of government and to open their borders to free movement of labour, goods and capital. The extent to which Eastern Europe has changed to adopt our democratic norms is not yet proved, and Poland and Romania are both in different ways profound challenges to the liberal and free society the EU has tried to impose, but to date the model has, broadly speaking, worked both to attract new members and to keep them in line once admitted. The almost unimaginably worthwhile and desirable positive which the EU then holds out is the possibility of integrating Turkey and Russia into our UK and western European model of civil society. The adoption of a secular free social order in these two nations would be the single most positive development we could aspire to in our lifetimes, and it is perhaps achievable if we can show the EU has surmounted its current problems. There are those who might argue that a Brexit followed by depression and disorder in the UK would be a good way of demonstrating first how beneficial the EU can be but this assumes that the EU would survive without us, and as I argued in my previous article we should assume that a success for UKIP here would be rapidly followed by others playing the same nationalist theme elsewhere and the breakdown of the Union as we know it.

So my positive statement about the potential for the future is rather similar to the hopes of those sitting down to sign the Rome Treaty sixty years ago. But whereas their dream was limited to making the next 50 years peaceful in Western Europe my suggestion is that in the next 50 years our aim should be to heal the great divide which opened up in 1054, to bring an end to the instability on the eastern and southern borders of the current EU by making it very obvious that the system of parliamentary democracy we have built can lead to peaceful resolution of disputes and offers a framework within which individual countries can maximise the well-being of their citizens. I believe that the existence of a common agreed framework which sets rules of civilised behaviour will also be likely to help preserve the UK as a united country, and most importantly to help preserve representative democracy and thus the freedom we enjoy today for future generations. If we can extend the current union to bring in Turkey, its first Muslim nation, and Russia, the most aggressively threatening European power, we will have made the world a much safer place for our children and reversed the single most costly policy error of post Roman European governments.

This article was published in the Cambridge Business Magazine – May 2016 Issue 54

Stocks in Focus: Next

This week Oliver Phillips looks at Next plc, a former stock market darling that has recently fallen out of favour with investors.

Next is divided into two divisions, Retail and Directory. The Retail division represents the bricks & mortar side of the business which sells to consumers on the high street and in retail parks. The retail sector as a whole is under strain and this division has seen a modest decline in recent years – management have attempted to cushion this by focussing on their retail park offerings and increasing average store size. The Directory division, the online business which has evolved from a mail-catalogue offering, has been the main driver of growth in recent years and has enjoyed a reputation for setting industry standards for logistics infrastructure and delivery capabilities.

Having reached a high of £80 last October on the back of consistently strong growth within Directory, the share price has since slumped to around £54 – so why have investors decided to take such a different view on the business? First and foremost, growth has been beginning to slow in the Directory division and there is a fear that the business has reached maturity in the UK market. Trends in the retail sector are also uncertain, and some predict the polarisation of consumers towards either premium or value products, away from the middle ground that Next currently occupies.

Looking forward, investors need to consider whether or not the business can continue to drive profitable growth. On the one hand, management has a strong track record of delivering, even in tricky circumstances. On the other hand, the fate of BHS shows that failure is punished hard in the retail sector.

Stocks in Focus: Intertek

This week I am writing about Intertek following the announcement that Chief Executive, André Lacroix has purchased a further 100,000 shares, costing approximately £3.27m.  This effectively doubles his investment in the company.

Intertek is a global testing, inspection and certification company.  They are one of three major players in an otherwise fragmented market and have a breadth of skills and knowledge which provides opportunities in a number of different sectors.  The markets that Intertek operates in include testing children’s toys as well as electrical testing and certification and checking oil shipments.

The fall in the oil price at the end of 2014 sparked fears that Intertek’s profits would be hit by a number of contracts being cut due to their exposure to this sector.  However the company’s profits remained more robust than investors feared and consequently the share price has rallied.  With the share price up 23% over one year investors may start to worry that the shares look expensive.

The announcement that the Chief Executive is willing to increase his holding suggests that the board is confident that the current price still offers value, despite its recent strong performance.   Since taking the Chief Executive role a year ago Mr Lacroix has indicated that he will continue to make bolt-on acquisitions focussing on the higher margin and higher quality parts of the business.  Clearly he feels confident that this will continue to add value for shareholders.

Emerging markets – Is the return to favour sustainable?

For the last several years the emerging markets story has been one of frustration and disappointment, with the sector under-performing its counterparts in the developed world by a wide margin. In January all of that changed and the sector has been one of the best performers so far this year. To put some numbers on this, the broad EMG sector has delivered a total return of around 8%, against which the developed markets have struggled to produce returns of 2-4%.

The main driving force behind this has been the sharp upward spike in oil and commodities prices. No surprise there but it is interesting to note the very high degree of correlation – around 92% – that has prevailed. Much of the fortunes of the emerging markets are also tied up in currency movements, with the strength or weakness of their currencies relative to the US$ having a huge influence on their ability to make progress. A third influence, but one that varies from country to country, is the political climate. This is underlined by the turmoil presently occurring in Brazil which is attracting nervous sellers and opportunistic buyers in equal measure

It remains to be seen whether the rally will continue and the dramatic upturn in emerging markets suggests that investors may be taking much on trust. For markets to progress from here it will take continuing currency strength, lower inflation and a sustained improvement in company earnings.

For more information, contact Alastair MacDougall on 01223 720255 or visit

Points of View: O2 and Three Deal

This week I am looking at the £10.5bn deal between O2 and Three. CK Hutchinson, owners of mobile network Three, proposed to take over Telefonica’s UK mobile operator O2 last year. Since then, the bid has been under review by European competition authorities, including the UK Competition and Markets Authority (CMA).

The merger would create the UK’s largest mobile operator and reduce the number of competitors in the UK market from four to three. Regulators are concerned that the resulting mobile giant and reduction in competition would lead to rising prices and lower innovation in the industry. Consequently, the CMA has urged the European Competition Commission to block the deal, arguing that the merger would harm British consumers. Ofcom, Britain’s telecoms regulator, has also criticised the merger for similar reasons.

This deal differs from BT’s purchase of mobile network operator EE, which has recently been given the go ahead by the CMA. BT currently does not own any mobile assets and as a result, the deal will add a mobile offering to the company’s product base without affecting the number of competitors in the industry.

Consolidation in the UK mobile telecommunication market is one of many politically charged subjects facing Brussels, which is concerned that a regulatory mis-step involving Britain could fuel bitterness against the EU ahead of the Brexit referendum.  The European Commission will have the last word on whether or not to approve the deal, and a final decision is expected before the 20th May.