UK Budget day

It's UK budget day today and one of the things that investors should be looking out for is any announcement on whether AIM shares can be included in tax free ISA's. I've read that it might not happen until 2014 and I would expect some announcement today of a likely date. It would be a bonus if it is announced that they will be allowed from next month, the beginning of the new tax year in the UK, but UK investors shouldn't bet on that.

Update: Announcement that AIM shares to be exempt from stamp duty.

Public Sector Watch, IDOX

So many companies today do business in one form or another with the public sector. Some may rely too heavily on Government contracts while for others it is part of their business. Given the austerity measures that Government is taking right now, it is probably better to find companies that do the latter than the former. Those that rely totally on contracts with the public sector have little to fall back on if the money dries up.

IDOX is an AIM company that reported today in positive terms about its business with the public sector.

The Group's three key metrics being revenue, EBITDA and adjusted* pre-tax profit, are all expected to be comfortably ahead of consensus market expectations for the full year. Like-for-like organic growth has also been particularly encouraging in both the public sector and engineering software divisions which, together with our active acquisition programme, will deliver significant top line revenue growth for the year.

The Public Sector division continues to benefit from assisting local councils to achieve their cost savings and is expected to perform better than forecast, together with organic growth at a higher level than anticipated, due to the successful implementation within UK councils of our managed services and hosting products. The Group has been awarded a framework agreement by the Government Procurement Service for G-Cloud Services following an application and review of its Cloud offerings.

The CEO gives a good description of what is now expected from those companies doing business with the public sector.

"We continue to develop new and innovative methods to drive productivity within the Public Sector, a market which is now focused on managing costs and efficiency. Our strategy to differentiate within the Engineering Information Management sector, by being the only provider to offer a cross platform interoperable solution, is now beginning to show results and, in 2013 this division will continue the process of adding new markets to its North American core. "

The shares are up around 10% today on the expectation that the company looks forward to being comfortably ahead of consensus market expectations for the full year when it reports on 12th December. Looks like one to watch out for.

http://www.digitallook.com/news/rns/20490361-30992/IDOX-Trading_Update_html

IDOX to beat expectations in 2012

Public Sector Portfolio Watch - Update - QinetiQ

If you want a good example of a momentum share right now then take a look at QinetiQ.

QinetiQ was sold off by the last Labour Government in 2006 and for some time it looked like those who bought into the IPO had been sold a turkey.  It came to the market at 200p a share and after an initial rise in price it has spent most of the last 6 years underwater.  It is still underwater, but at 196p it is now standing in the shallow end of the pool and long term investors who bought in at the IPO might just be about to see a paper profit.

Of course, in the seven years since it came to market there have been ups and downs, but mostly down for those that bought at the wrong time, like at the IPO.  However, since it dipped under a pound back in August 2011, it has been on a steady almost relentless upward rise, just about doubling in price. This has also happened against the backdrop of uncertainty in defense contract procurement going forward. According to the latest QinetiQ trading update, nothing much has changed regarding this uncertainty.

Trading Environment and outlook

The degree of political and economic uncertainty in both our major markets means that forward visibility for the next six months is much lower than usual, particularly in the US. However, the strong performance in the first half gives the Board confidence that the Group should at least meet its expectations for the current year, absent any material change in customer requirements. The Board's view of the outlook beyond the current year remains unchanged.

http://www.digitallook.com/news/rns/20380573-38318/QQ_-Trading_Statement_html

So why so bullish?

Public Sector Portfolio Watch - Update 3 - May Gurney profit warning

Been a while since looking at those companies that rely heavily on public sector spending.  AIM company May Gurney came out with a profit warning this morning that so far today has sent the shares down around 44%.  This tells us a couple of things about how quickly the share price of some companies can fall very quickly.  First, it relies heavily on one source of income, around 60% from the public sector.  Second, as a smaller company the share price volatility can often hit hard and fast on the downside, many small investors in this company probably don't even know that the share price has fallen today. They will get a shock when they return home from work and check this evening and probably wonder what has happened. Some buy and hold fundamental investors in this share who rarely check their portfolio might not find out for weeks.

The Public Sector portfolio - Capita and Drax - Update 2

At the risk of being crude, a few years ago friends of mine that worked in the public sector had to deal with outsourcing specialists which included FTSE behemoth Capita.  Capita was not liked, the company was referred to as Crapita.  In that particular case, Crap..er Capita actually lost the local authority contract, but to look at the company now, you'd be forgiven for wondering whatever happened to austerity?  Capita has just announced some impressive results that are worth noting.

The Public Sector portfolio - update 1

Increasingly since the 1980's there has been a growth of public/private sector joint ventures.  Mrs Thatcher popularised contracting out, NuLabour embraced it further and today there are a wide range of FTSE350 companies that have a significant stake in ensuring that they get their share of Government contracts. However, in this time of "austerity", there appear to be two viewpoints, one good, one bad, surrounding companies that rely on, or have a significant amount of their earnings from Government contracts, especially if you are looking to invest in them.

The bad, negative argument is based on the simple fact that Government is looking to cut back, there will be less contracts available, or increasingly less money in the pot and therefore the contracts available will not be so lucrative.

A good example of one company that was hit hard by a sudden change in Government policy and a cutback in funding available was green energy company Eaga.  Eaga ran the Warm Front contract introduced by the previous Labour Government.  It was a substantial part of their earnings and profits.  When the new Con/Lib coalition took over, the Government decided to go in a different direction, Eaga's Warm Front contract was drastically reduced, earnings and profits downgraded, the share price collapsed.  Eaga shareholders got some return when Carillion made a bid for the company and took it over.  It's just possible that they overpaid, Carillion, despite doing reasonable business from Government contracts in the last few years has seen its share price fall as well.

The good, positive argument is based on the fact that while Government will be looking to cut back, substantial contracts will still be available and companies that have built a reputation in this sector will be at the front of the queue to get the business.  Also, in some areas there might actually be more business available as Government departments look to outsource their work and save money as private sector companies in competition with each other will bid for the business.

Unfortunately, such a bidding process doesn't always work to the advantage of Government departments looking to save money.  How often do we read of headlines of projects run by private sector companies for the Government that go over budget?  And once that contract is signed, unless there is a decent penalty clause to stop it, the taxpayer will end up footing a higher bill anyway.

All of which brings us to G4S and its Olympic staffing farce, which may well have lost it friends in high places.  Questor in the Daily Telegraph argues;

The outsourcing group gets about 10pc of its revenues from UK pubic sector contracts such as welfare-to-work programmes and prison service contracts. This is a relatively small proportion of the overall group. However, globally, government contracts accounted for 27pc of G4S's revenues in 2011.

 As analysts pointed out yesterday, G4S management said that the UK public sector was one of the more active parts of its bidding pipeline at an investor day held in May. Tendering for contracts at major events may also be a problem for the group – especially in the near term.

Hardly surprising then that the G4S share price has been in a bit of a freefall that would make an Olympic diver proud.

Whether that fall is overdone or not only time will tell, but there is a lesson here for investors to keep an eye on how much business a company does with the public sector.  Market sentiment is largely negative and weary towards such companies at the moment because the downside is greater than the upside.  Some companies are still doing well out of public sector business, but it won't necessarily be reflected just yet in share price performance.  The market will probably need to be convinced that it can be maintained going forward.  Trouble is, no one can be sure of the extent of the cuts to come and which FTSE companies will get hit.

Quote; G4S Marathon Slog Daily Telegraph

The "Public Sector" Portfolio

This is just an idea I want to run with.  A portfolio of FTSE350 companies that to some extent depend on Government contracts for their business.  It will be interesting to monitor performance over time to see what effect austerity and Government cuts have on the bottom line for these companies.

I've chosen 4 to follow;

Capita 

Capita is one of the UK's leading outsourcing specialists. Established in 1984, the company now counts both private and public sector businesses among its customers and is perhaps best known for its involvement in London’s congestion charging scheme.

Serco Group 

Global service company Serco manages research laboratories, local education authorities, leisure centres and prisons. Its business also includes the operation of London’s Docklands Light Railway and air traffic control towers in the Middle East and across America.

Carillion 

Provides expertise in commercial and industrial building, refurbishment, civil engineering, road and rail construction and maintenance, mechanical and electrical services, facilities management and PFI Solutions.

Qinetiq

QinetiQ is one of the world's leading defence technology and security companies, manufacturing and supplying products such as sensors for weapons, advanced robotic systems, port security products and advanced security for computer systems.

More to follow.


*Company description from DigitalLook.