More Questions Than Answers
Nick Buckles, chief executive of G4S (GFS), took the only sensible line when he faced a House of Commons select committee anxious to discover what had gone wrong with the company’s Olympic Games contract. After a sporting event widely and deservedly acclaimed as a triumph, with the Paralympics looking to bring further credit on the UK, the fiasco in which G4S failed to recruit enough security staff was the one blot on an otherwise sunny landscape.
So what went wrong? Who knows? Buckles certainly doesn’t seem to. He claimed that he could not comment on what happened until PricewaterhouseCoopers has completed a review on behalf of the board. Play for time and say as little as possible is a good tactic when you are deep in a mess.
Apart from the continuing uselessness of MPs in trying to extract information from those summoned to appear before select committees, the main point is that many governments are determined to press on with outsourcing, and that includes the UK government.
G4S has set aside £50 million to cover the cost of the debacle and fears that the bill could be even worse. This has battered the shares. Given the propensity of UK governments and local authorities to heap rewards on companies that carry out public programmes but rarely make them pay for their mistakes or shortcomings, I suspect the bill will be less rather than more.
Only last week three police forces confirmed that they are still considering G4S for outsourcing contracts.
G4S has still made £61 million profit in the first half of this year after the Olympics loss and £24 million in restructuring charges. The interim dividend has been maintained.
Meanwhile Serco (SRP) has announced £4.5 billion of new contracts, boosting the outsourcing company’s order book to £19.4 billion. Excluding an exceptional gain, profits were down in the first half but those new orders augur well for the future. As a show of confidence, Serco has raised the interim dividend by 6%.
Serco’s prospective yield is only 1.7%, which is not particularly tempting given the difficulties it faces in the US, where the political stalemate is squeezing federal contracts. If the logjam is broken in the November elections, the position could improve and if I were a Serco shareholder I would be inclined to hang on.
G4S has a prospective yield approaching 4% after the share price fall this week. If you have an appetite for risk, they are worth looking at, but I stress the word risk.
Frying Tonight
Out of the frying pan and into the fire goes Simon Fox, who is leaving music and video retailer HMV Group (HMV) where he is chief executive and taking a similar role at newspaper publisher Trinity Mirror (TNI). It is hard to say which job is the less attractive, given that both groups are struggling so badly, but Fox will be well rewarded financially, which will help him to sleep soundly at night.
One cannot blame Fox for all the woes at HMV, which was already in a mess when he joined, but he has singularly failed to adapt the business to the 21st century over the six years he has been there and there is no reason to think that he will perform a better job at the Trinity Mirror. Furthermore, it’s concerning that he is lacking experience in newspapers and journalism.
Trinity Mirror shares added 1.75p to 38.5p on news of Fox’s appointment. Any rise in the share price is an opportunity to get out. As for HMV, the shares have been almost obliterated. Even at 3.25p they look expensive.
Another Hot Seat
I really cannot see why Fox was greeted with a share price rise while 
Barclays’ (BARC) shares eased on the appointment of Anthony Jenkins as chief executive, replacing the ousted Bob Diamond. Perhaps investors were concerned that Barclays had appointed an insider rather than going for a new broom. Perhaps others are worried that he has no experience in investment banking, the part of the business that has caused so much angst.
I find the appointment of Jenkins mildly, though not overwhelmingly, encouraging, not least because Barclays has moved quickly, but not too hastily, to plug the gap at the top.
The fact that Jenkins is an internal promotion does not mean that he will fail to grasp the nettle of investment banking. And as a Brit who spent a good deal of his early career in the United States, he could be the right man to deal with the irate American authorities raging over Libor rigging.
Barclays is by no means an obvious ‘buy’ as it has many more hurdles to clear with the regulators, particularly the selling of interest rate swaps and also fees paid when the Qataris came to the rescue with a cash injection that kept Barclays out of UK government ownership. However, it just became a better, rather than a worse, prospect.
See You There
Two dates for your diaries, both in London. I shall be running a half-hour seminar for less sophisticated investors and speaking on a lunchtime panel at the VectorVest Investor Gathering on Saturday 29 September at the Cavendish Conference Centre. I hope any readers of this column will take the opportunity to come and chat to me in between times.
Attendance is free but you do need to register in advance. See http://www.vectorvestgathering.co.uk/ for details.
Then on Friday 26 October I shall be running my usual hour-long seminar on fundamentals at the London Investor Show at Olympia and will also be looking out for readers during the day. The website is www.londoninvestorshow.com.
Market Performance (August 28-31)
FTSE 100: -1.13%
FTSE 250: -0.34%
FTSE All Share: -1.00%
FTSE Small-cap: +0.16%
FTSE AIM 100: +0.04%
FTSE Fledgling: +0.18%
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Rodney Hobson is a long-term investor writing about his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
