Outsourcer Connaught’s profit warning released late last Friday afternoon creates two problems for investors. First, what to make of the details that revenues would be impacted by £80m, after 31 social housing contracts were deferred due to capital expenditure cuts. And second, whether this deferral trend could start to affect other outsourcers with housing exposure.
The company’s shares plunged 66 per cent in the three days after, dragging Mears’ price down 11 per cent, Mitie’s 9 per cent and eaga's 5 per cent. Connaught partly blamed the harsh emergency budget for its shortfall, but important details are still unclear. Chief executive Mark Tincknell told investors that the issues around social housing contracts had started to arise in April. But in the group’s half-year report on the 27th of that month, it said that visibility was high, with 97 per cent of revenues booked for 2010 and the order book up from £2.7bn to £2.9bn. What's more, a relatively small proportion of the group’s total revenue exposure is related to capital expenditure projects such as fitting new kitchens and bathrooms, so the profit impact looks disproportionately high.
So what does this mean for the rest of the sector? Bob Holt, chairman of Mears, said the group had not seen a reduction in capital spending on projects and nor had the peers he’d spoken with. “This is not a sector-wide problem,” he added. Supporting this assumption is the fact that registered social landlords make up a large part of the market, and tend to be not-for-profit organisations, so use rents to maintain properties, rather than central government subsidies or grants.
