Sell Hays before it falls further
McAlpine is not worth supporting; Northgate's van hire business steps up a gear
Friday 10 January 2003
What is the point of Hays plc? It is a question oft asked by investors of this sprawling personnel, haulage and parcel delivery conglomerate, and at last it is also a question being asked internally, by a new chief executive charged with a big shake-up. Colin Matthews presents the results of his root and branch review in March and there are hopes the outcome may be a break-up of the group.
All of which might have made yesterday's trading update seem irrelevant as far as long-term investment judgements go. It is certainly true that Hays is likely to be a very different beast by the end of the year, but the trading conditions set out, division by division, yesterday will inform the prices that might be raised by any disposals – and the omens are really not good.
As a rule of thumb, the smaller the division, the more likely it is to be disposed of and the poorer the current trading. In its loss-making commercial services division – which includes call centres, outsourced administrative functions for business, and archive storage – the trading continues to get worse. And there has been no improvement in the mail and express delivery division, which has suffered now the Royal Mail has sharpened its competitive claws. Further out, the award of a licence to deliver mail should take Hays into a new market, but this isn't going to help this year's figures.
There are gathering clouds over the personnel business, even though this has often confounded sceptics in the past. It still appears to be winning market share in the current difficult climate, but surveys suggest the demand for accountancy and construction personnel, where Hays is strongest, is slackening markedly.
The share price fall to date has been severe, but even now the shares have been held up by the prospects of corporate action, trading on 10 times forecasts of current year earnings. They are at risk if the strategy review fails to be as dramatic as hoped, or if a turbulent UK economy means disposal proceeds are delayed or disappointing. And all the while, forecasts for future earnings are being ratcheted downwards. Sell.
McAlpine is not worth supporting
Alfred McAlpine has not fared well since it hung up its spirit level and exited the boring old business of building houses for the seemingly sexier world of support services.
That was just over a year ago and the timing could not have been worse. Since then support services – which at the low-margin end occupied by McAlpine includes tasks such as maintaining companies' buildings and keeping their air conditioning ticking over – has plunged from stock market favour. Having touched nearly £5 last March, the company's share price crumbled faster than something built by a cowboy builder. Yesterday, they bounced 7.5p to 243p after Oliver Whitehead, the chief executive, said the year just ended turned out according to expectations and things are "steady as she goes" for 2003.
The news may not be electrifying, but at least McAlpine has managed to avoid the fate of others in the sector, which has seen a spate of profits warnings. This is partly because McAlpine has eschewed taking on unprofitable business just for the sake of growing its market share. It has now largely achieved its aim of a minimum bottom line profit margin of 5 per cent across its businesses, from non-housing construction, through the faster growing support services, to more heavy-duty work such as digging up roads for electricity companies.
But McAlpine has remained a tiddler in its sector and has only made minor acquisitions since selling its house building business to George Wimpey in 2001 for £463m. It is returning £100m to shareholders through share buy backs, but there are grumblings this is too little and not being done fast enough.
Brewin Dolphin forecasts the group will make £40m in 2003, putting the shares on 9 times earnings. The rating is less demanding than a year ago but there are more attractive propositions higher up the support services food chain. Avoid.
Northgate's van hire business steps up a gear
Managers at Northgate, the white van men, have steered a pretty impressive course over the past few years, promising in 1999 to double the number of vehicles in its UK fleet within five years. They look like reaching that destination without accident.
Yesterday, they promised another grand five-year plan by the summer, and posted interim results showing profits grew 16 per cent to £18.8m in the six months to 31 October last year.
Northgate hires commercial vehicles to companies that don't want the hassle and inflexibility of owning their own fleet. Barely 10 per cent of the UK's vans are hired in this way, compared with 30 per cent in the US, so the trend to outsourcing probably has some way still to go. The worry is that Northgate's growth could be derailed by a substantial slowdown in the UK economy this year, and some analysts thought they detected signs of this in yesterday's results. But it seems more likely that the underlying trends will continue to buoy the group and may even be sped up: if a business is obliged to slash capital expenditure, new vans will have to be hired.
Together with opportunities to expand abroad (adding to a successful foray into Spain), the shares, up 16p to 427.5p, are worth tucking away.
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