FTSE 350 Review: Outsourcers back in demand

But Covid-related contracts boosted order books, and as pointed out in our recent feature on the sector ('How outsourcing reinvented itself', IC, 9 Dec 2022), the major players have had little trouble in filling them since. Companies that have struggled either to find staff to fulfil non-essential roles in-house, or at least to do so competitively, have been willing to farm out operations to external providers.

Industry bigwig Serco (SRP) said last month that its 2022 revenue would come in at £4.5bn, slightly ahead of the prior year despite the fact that Covid-related revenue had reduced by £480mn as the Test and Trace scheme provided to the NHS wound down. Mitie also said that in the six months to 30 September it managed to replace all of the short-term Covid contracts that it lost, posting flat revenue of £1.9bn. Both companies reported continued strength in orders, with margins insulated by inflation-related contract provisions.

Little wonder, then, that investors are showing an interest. Shares in both companies climbed by 15 per cent over the course of last year.

The going has been slower at the only other FTSE 350 outsourcer, defence-focused contractor Babcock International (BAB). Its shares fell by 12 per cent last year despite expectations that European governments will have to spend much more on defence following Russia’s invasion of Ukraine. A restructuring led by former Cobham chief executive David Lockwood has led to Babcock bringing in almost £450mn in asset sales. Alongside other cost-saving measures, these have helped to bring net debt down to £1bn by 30 September, from £1.75bn two years earlier. This discipline was rewarded by S&P Global in December, which upgraded its rating on the company’s bonds by a notch to ‘BBB’, moving away from the risk of slipping into junk territory.