Added Spice

Businesses producing reliable growth have been largely ignored this year as investors looked to cyclical stocks that are hoping for a radical revival in earnings triggered by an economic recovery. Utility outsourcing specialist Spice is one such company, rated far more lowly than cyclical stocks despite offering defensive growth credentials they can only dream of.

True, the recession has not been without its challenges for Spice. Its facilities management business - which has exposure to the retail sector - has not fared well, and nor has its gas business. Although Spice in fact generates less than 10 per cent of cash profits from these areas and has consistently delivered on its market expectation, these minor problem areas have nevertheless proved a drag on its share price.

That could be because Spice's wide-ranging portfolio of business lines has disguised the tantalising prospects hidden with the group. So, management's decision to improve clarity by reorganising it into two divisions looks sensible. Essentially, it now reports its white-collar and blue-collar activities separately. The supply division provides white collar services, ranging from billing services, to energy procurement and energy-efficiency consultancy - these generate 35 per cent of the group’s underlying cash profits from 9 per cent of the turnover. Legislation is becoming an increasing driver of growth for the division, though schemes such as the Climate Change Agreement and Carbon Reduction Commitment.

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The white collar division is also benefitting from cross-selling opportunities with customers from its high-volume, low-margin blue-collar business, which provides services such as meter installation and reading and still accounts for the bulk of group sales and profits. There are particularly promising opportunities to sell the group’s billing services to water clients, for example.

Demand for outsourced work in both the supply division and the blue collar Distribution division is likely to be spurred by new five-year regulatory reviews in both water and electricity sector. The initial plans from both reviews look like they will put increased pressure on companies to make savings, with outsourcing a key route to achieve these efficiencies. Already the distribution division is reporting good levels of bidding opportunities related to the reviews and has won an overhead lines contract with Scottish Power and an engineering services contract with CE Electric.

Furthermore, Spice believes more radical outsourcing opportunities could emerge from expected changes in ownership of key utility assets. It's thought that acquisitions by infrastructure investors, as opposed to a trade buyer, could result in a significantly increased level of outsourcing in the utility sector.

Other industry developments also look set to benefit Spice, such as the roll-out of smart metering. This could prove a boon, not least for Spice’s training business in Corby. It is estimated by broker Investec that 9,000 engineers will need to be trained by 2015 if smart metering is rolled out across the country by 2020.

While the group clearly has a number of long-term opportunities, the work that underpins much of its growth this year and next is already booked in, which means analysts’ forecasts come with a good degree of certainty attached. And Spice’s end market is one of the few areas of the UK economy that still looks reasonably defensive as much of the spending utilities undertake is underpinned by regulatory requirements.