There is an increasing trend towards outsourcing and independent industry observers believe the integrated market will grow faster than single service outsourcing. This was emphasised in Spotless’ Management Presentation to Pacific Equity Partners and has been confirmed by Spotless’ experience.
One of the independent industry observers is Frost & Sullivan (www.frost.com).
‘In Spotless’ experience, contracts with increased service integration and duration generally deliver higher contract profit margins,’ the just released Presentation noted.
“The presentation outlines a company well down the path of a transformation program to enable the group to provide large scale integrated contract management services and supply chain solutions, which is on track to deliver strong earnings growth over the next few years,” commented The Australian’s respected finance writer Bryan Frith (The Australian 22 December).
“It includes a $110 million capital expenditure program to replace its 135 IT systems with a modern common IT platform that, when completed, is expected to boost EBIT by more than $17m a year.
“The presentation forecasts near static earnings for 2012, with EBIT in a range of $90m to $94m compared with the 2011 reported result of $90.1m. But the board believes that in three to four years Spotless will be reporting EBIT in a range of $140m to $150m, an increase of 49 to 66 per cent.
“That forecast does not include the troubled coat hanger business, Braiform, as the board and management consider it is too difficult to predict that far out. But they believe Braiform has now been improved to the point where it will be near break-even, or slightly positive, and not a drag on earnings.”
The Presentation stated that, ‘Benefits of the Business and IT platform are expected to increase as the business grows as a result of operating leverage. Spotless expects to achieve additional margin uplift and is targeting a 5% EBIT margin for the Facility Services business over the long-term.’ Its FY 2011 EBIT margin was 3.7%.
The presentation noted its international peers’ EBIT margins in financial year 2011 included Compass Group 6.4%, Rentokil Initial 5.7%, Serco 5.6%, Sodexo 5.3%, Mitie Group 5.1% and ISS 4.7%.
In summary, Spotless summarised its Facility Services business thus:
*Spotless is nearing completion of a comprehensive Transformation Program that started in FY08
*The Company has achieved significant milestones to date and delivered strong revenue and EBIT growth in the Facility Services business despite tough economic conditions
*Progress to achieve strategic goals remains on track
*Spotless reiterates the FY12 outlook previously provided at the 2011 AGM and expects full year Group Reported EBIT (prior to any engagement costs) to be in the range of $90 to 94m
*Facility Services forms the core of Spotless and is a valuable asset with strong growth potential
*The strategic benefit of the migration of Facility Services from a largely single-service, geographically focused business to one that now also offers multi-service and fully integrated solutions is significant
*The future of the Facility Services business is to go even further down this path by emphasising preferred sectors and using Spotless’ current leading market positions and scale to drive greater value for the business and its clients
*Spotless‘ integrated service offering means that it is well placed to capture the significant benefits of an expected acceleration in the Integrated Facility Services market, and continue to secure high value PPP contracts that will deliver medium and long-term value