FTSE 350 support services – general: Profits under pressure

Prime minister David Cameron said the Open Public Services White Paper would clear the way for increased private sector competition. But outsourcers are facing a tough environment of project delays and shrinking public budgets. Robin Speakman, an analyst at Shore Capital, said: "Outsourcing's share of the pie is growing, however the pie is shrinking" – outsourcers will be required to maintain service levels when it comes to providing services such as rubbish collection and pot hole repair, but will be paid less for doing so.

G4S (GFS), the security provider, learnt the hard way that not all government contracts are a licence to print money. They overpromised and underdelivered in spectacular fashion providing security for the London Olympics. G4S paid the penalty by being stripped of a contract to manage the Wolds prison when the Ministry of Justice announced its dramatically scaled-back prison outsourcing plans, and investors will be watching closely to see if the reputational damage has been lasting and the government withholds further work.

It's not just G4S that has to worry about this, though. The fiasco over the Olympics contract reinforced the public perception that outsourcing doesn't always bring the promised benefits – and certainly any public services involving a lot of staff are complex and risky. The u-turn on prison outsourcing shows that the government is very sensitive about further bad publicity in key services, which could mean the long-awaited wave of prison and care home outsourcing becomes more of a tortuously slow trickle.

Investors should also keep a close eye on cash flow at Serco (SRP), Capita (CPI), Interserve (IRV) and Mitie (MTO) as the provision of big government contracts could strain cash in the year ahead. Capita has recently announced two big contract wins with Barnet and Staffordshire councils, and Mitie was awarded a housing contract with Hammersmith and Fulham council; these will support continued revenue growth but are likely to be at lower margins.

Another sector that experienced some profit pain was temporary power, as Aggreko (AGK) shocked markets with a profit warning in October. Aggreko has been a compelling growth story in recent years and the shares have responded accordingly. But rapid expansion plans have now hit the buffers as global growth slows. The company's final results in March are eagerly anticipated as management will provide much needed detail on future investment plans, but there is a worry that a lack of large one-off events like the Olympics – and the ongoing military withdrawal from Afghanistan – will mean expensive new kit stands idle this year.

Capital investment was also high on the agenda at tool hire company Ashtead (AHT) as it took advantage of a resilient US construction market and customers unable to get finance to buy equipment. These conditions should persist in the year ahead, although Ashtead's shares are now very highly rated on around 17 times forward earnings estimates.

By contrast, the consultant engineering sector still looks good value as the likes of WS Atkins (ATK) and Hyder Consulting (HYC) look to expand into the Middle East. The sector is also undergoing a period of consolidation, and if sterling were to weaken it could prompt bids from North American suitors.