Jitters over PPP do not extend to Carillion

Manufacturing malaise brings hard times for Johnson Service; Interserve is cheap, but not cheap enough

It's a hard life operating in a sector that has fallen out of market favour. Just ask Carillion, the construction and support services group. It announced a perfectly good set of interim figures which were slightly ahead of expectations. It even said it would meet full-year forecasts. The result? Shares in the company closed down 9.5 per cent at 143p. Welcome to the harsh new world of unloved public-private partnerships.

The Government's plans envisage PPP expenditure of £75bn over the next 10 years which ought to be a boon for companies like Carillion. On top of that, there is the multibillion-pound market for outsourced corporate services, which Carillion also operates in. Its order book stands at £5.3bn.

Pre-tax profit almost doubled to £16.1m, for the six months to 30 June, partly because of its acquisition of GT Railway Maintenance. However, margins in the business services and construction divisions did not progress.

Yesterday several of Carillion's competitors also saw their shares fall steeply, including Amec. The issue appeared to be concerns over future corporate expenditure on outsourced services, because of the economic downturn. About 75 per cent of Carillion's turnover comes from the private sector.

The Cityhas rapidly fallen out of love with this business, mainly because of Amey's well-publicised problems with its contracts and its protests over high bidding costs involved. Amey now feels that the PPP market is so unattractive that it is selling out of many of its PPP projects. The City once thought PPP was a one-way bet to riches. Now its view is much more uncertain.

Carillion said that it had no problems with its 11 operational PPP projects or the five under construction. It is also comfortable with the bidding costs involved, although these seem high at £15m a year. On corporate expenditure, Carillion argues that, in economic downturns, there is a greater incentive for companies to outsource non-core services.

Market sentiment towards companies like Carillion may be weak but there was nothing in yesterday's forecasts that would undermine the longer-term investment case for the company. Market jitters aside, the fundamentals remain sound and, on a forward p/e ratio of 9, the shares are not expensive. Investors should hold their nerve.

Manufacturing malaise brings hard times for Johnson Service

It's bad enoughrunning a business in a slowing economy. But it's especially tough when the bulk of that business relies on renting uniforms and protective overalls to Britain's troubled manufacturing sector, as Johnson Service has found out.

Factory employment levels have been in free fall for four years, which has, inevitably, hit demand for the garments supplied by its Apparelmaster unit.

Sadly for the workwear supplier – which also owns the UK's largest dry-cleaning business – the downturn in other areas of economic life, such as the leisure industry, has also affected demand for the linen it supplies to restaurants in posh hotels via its Stalbridge unit.

On top of this, when cash is short the general public apparently prefers wearing musty suits to work than footing dry-cleaning bills,. So trading across its 517 dry cleaners has also been tough, with underlying sales rising just 1.8 per cent.

Further problems in Ireland, where Johnson Service just can't make its 1998 acquisition of a textile rental business pay off, only deepened the gloom that has hung over the share price since the group warned on profits in July. And an annual bill of £3.5m to fund a pensions black hole didn't help much either.

But help is at hand in the form of Stuart Graham, a new chief executive. He picked up the mantle in June from Richard Zerny, who analysts feel had taken his eye off the ball.

Mr Graham's hands-on approach – he has spent the past three months on the road – has gone down well with the City. Management shake-ups will be important as is a better focus on the group's 50,000 customers.

Pre-tax profits in the half-year to 29 June actually rose to £9.2m from £7.5m, but that reflected a raft of exceptional charges in 2001 rather than real growth and turnover fell to £109.3m from £110.7m.

The shares, down 21p to 264p, have almost halved since May, and are not expensive on a rating of 10 times p/e. Only for very patient buyers.

Interserve is cheap, but not cheap enough

Interserve, the construction services firm, saw its foundations severely weakened yesterday when its shares fell one-third after the company dealt investors a double blow. The shares collapsed 110.5p to 232p after the group warned that its markets looked subdued and reported figures beneath market expectations.

As ever, the problem is customers in the private sector who are, for obvious economic reasons, delaying signing new contracts. For Interserve, that means results for the second half of the year will be similar to the first half. Previously, they had been more second-half weighted.

In the six months to 30 June, Interserve reported a 33 per cent jump in pretax profits to £19.9m on sales of £557.2m, down from £636.5m in the same period a year before.

Analysts at Cazenove said half-year earnings were around 8 per cent beneath its predictions and reduced its forecast earnings for both this year and next by around 17 per cent. Interserve's equipment services business was particularly hard hit with operating profits falling 22 per cent. Its industrial services business, which carries out industrial cleaning, painting and electrical work for clients including BP, also struggled with operating profits down 5 per cent.

On the positive front, the company has a £3.4bn forward order book and is also preferred bidder, with partners, on a further three PFI contracts. It also predicts public sector work should remain buoyant where it believes there is "substantial planned expenditure".

But after Cazenove slashed its estimates, Interserve is now expected to make earnings of around 38p a share this year, putting the stock on a multiple of just six. That might look cheap, but this is probably not the time to buy.