UK Spending Cuts - The Aftermath
Hardly a stone has been left unturned or a sector spared from the UK Government’s spending cuts which are ripping through almost every industry. Earlier this year we looked at companies which investors anticipated would flourish or fail given their exposure to Government contracts. We highlighted Atos Origin as a potential loser as the identity cards project was scrapped as well and Hays Plc as job losses spread further than civil servants. Investors thought outsourcing companies such as Serco were set to prosper as outsourcing is regarded as an answer to cost cutting in the long term. With further news of state retrenchment this week we review investor sentiment in Atos Origin SA (EPA:ATO), Serco Group Plc (LON:SRP), Capita Group (LON:CPI), Balfour Beatty (LON:BB) and Southern Cross Healthcare Group (LON:SCHE).
Atos Origin SA, the international IT and outsourcing company may have long ago diversified away from the scrapped UK identity card project it had won but did this win over investors? Earlier this year short interest surged from 2% to almost 11% of total shares outstanding, which represented more than 30% of the lendable supply out on loan. The share price of this French listed firm fell from 40 to 30 EUR but recently rebounded. Investor sentiment has since reversed as short interest has fallen back down an average of 1.5% of total shares outstanding on loan in the fourth quarter. However, institutional investors do not seem to have regained their confidence in the company. Using stock ownership of funds who lend as a proxy for institutional ownership, we observe a decline in holdings from 15 million to 11 million over the year. Atos also still has a convertible bond in tow.
Outsourcing companies which serve major public sector organisations were the subject of positive investor sentiment. Considering Serco Group, we observe a build-up of short interest between April and October, where short interest increased exponentially from 2% to 10% of shares outstanding on loan. Some of this may have been due to the Government’s lack of enthusiasm towards the company’s request for supplier rebates. However, short sellers have since begun to cover their positions following recent earning results and short interest has reduced to 6% of total shares outstanding on loan. Institutional ownership has fallen since August from 117 million to 100 million shares.
Capita Group, which regards itself as the UK’s leading outsourcing company, follows a similar pattern in securities lending behaviour since the announcement of spending cuts from the new Government in the second quarter. Short interest began to build up in April, rising from 1% to over 6% by September. Short sellers have since spent the last quarter covering their positions reducing short interest to 3.5%. In contrast, institutional ownership has increased gradually over the year, peaking at 140 million shares in November. This has since declined a little to 133 million shares when the company advised of modest turnover growth for 2010 citing current public sector retrenchment as a factor.
Over in property and construction services, Balfour Beatty who bought segments from the collapsed ROK Group, saw short interest more than double to 3.5% in May. Short interest has since fallen to 1.5%, perhaps driven by the recent announcement that the company has been awarded a 5 year construction contract with London Underground. Institutional investors have reduced their holdings by 20 million to 185 million shares since July.
The UK’s largest care home group Southern Cross Healthcare Group has seen its shares impacted heavily since April and institutions have reduced holdings from 36 million to 24 million shares as local authorities negotiate to cut costs. Short interest peaked in July at 2.5% but has fallen to less than 1% following rumours of a takeover.
With the notable exception of Connaught and ROK Group, it is worth asking whether some investors overestimated the impact of Government spending cuts given many service providers have diversified business models and are not overly reliant on one sector. That said, it will be worthwhile keeping an eye on specialist firms like Southern Cross Healthcare.
