This year is likely to be dominated by the continued rehabilitation of G4S (GFS) and Serco (SRP), but also continued soul-searching over whether the outsourcing sector is fundamentally flawed. Such a view would have been bolstered by the recent deterioration in Capita's (CPI) prospects.
Twelve months ago Capita was the darling of the sector, untainted by the scandals that had rocked peers. But back-to-back profit warnings last year sent its shares crashing down. The group blamed referendum-related contract delays and a slowdown in its IT services division. It now plans to sell off its asset services division to reduce what has become an uncomfortable debt level. But the asset services business is high-margin, enjoys strong organic growth and represents a large chunk of profit. Anxiety over the disposal, together with uncertainty over future earnings (the City expects earnings to continue to fall in 2017), are likely to weigh on the group this year.
G4S and Serco, meanwhile, are now well into their turnaround plans. Buy tip Serco slashed costs and raised profit guidance twice in 2016. However there is still uncertainty over this year’s numbers, due to the sensitivity of profit to small movements in revenue or costs. With the shares up by over 70 per cent in the past 12 months, Serco’s ability to deliver current-year guidance will be closely watched. G4S has seen a revival in its shares, too, up almost a fifth on first-half results that flagged up strong cash flow. This year, look for the company to make progress towards its 2.5 times target ratio for net debt to cash profit. Disposals will continue to feature, with around £200m of proceeds possible over the next year.