Strike forces Jarvis to issue profits warning

JARVIS, the facilities management group, yesterday dented its reputation as a City favourite with a warning that this year's profits would fall short of market expectations owing to a lengthy industrial dispute.

The shares shed nearly 12 per cent to 478p after Jarvis said the cost of a nine-month action over pay and conditions by 4,000 staff in its rail maintenance business would mar its results.

The effects of the strike, masterminded by the Rail Maritime & Transport union, were compounded by the decision by Railtrack to delay a number of track renewal contracts. The two factors will cause a fall in profits for the year to March 1999 to below market expectations of around pounds 62.7m, Jarvis said.

City analysts immediately slashed forecasts by around 10 per cent to pounds 56m, still well above the pounds 36.7m posted in 1998. The company moved to reassure the market, saying it had reached an agreement with the RMT, which was to be approved in the next few weeks. Under the deal, Jarvis employees would receive a higher basic salary in exchange for scrapping overtime pay.

Henry Lafferty, Jarvis finance director, said the agreement could lead to significant cost savings as Jarvis would not have to pay overtime on weekend and night shifts, the periods during which it carried out most of its track maintenance work. Jarvis would also save around pounds 16m next year as it would not have to employ agency staff to replace striking workers.

City analysts said the resolution of the dispute, which started in June and continued intermittently until February, would benefit Jarvis's long- term prospects. One said that yesterday's announcement would do little to dim the Square Mile's admiration for the company.

Jarvis shares have enjoyed an astronomical rise from just 8p five years ago as the company transformed itself from a traditional building contractor into a fast-growing support services group.

Through a series of acquisitions and sales, Jarvis replaced low-margin, cyclical building work with the high-margin, secure stream of earnings generated by rail maintenance contracts and Private Finance Initiative (PFI) construction projects. The company now controls 60 per cent of Railtrack renewals contracts and 20 per cent of the maintenance work, and has about pounds 200m of PFI projects under way.

Some observers worry that this reliance on Railtrack will constrain earnings in the new millennium when new, lower-margin contracts will be auctioned. They say that to prevent an earnings slowdown, Jarvis must extend its forays into road and airport maintenance and expand abroad. "If earnings growth is to continue, Jarvis will have to reduce its reliance on Railtrack," said one analyst.

Supporters of the stock claim Jarvis is well placed to win a large chunk of the new contracts and to claim a slice of Railtrack's pounds 10bn investment in the railways over the next 10 years.

Moreover, the shares look cheap. After yesterday's fall they are on 15 times 1999 earnings, a large discount to market and to rival support services groups. Despite their run, they are still worth buying.