Outsourcers set for long-term gains from spending cuts

LONDON Wed Oct 20, 2010 4:46pm BST

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LONDON (Reuters) - Support services firms are set to make long-term gains from public spending cuts, analysts say, as the government enforces dramatic efficiencies across departments and slashes local authority budgets.

On Wednesday Chancellor George Osborne revealed the extent of the toughest spending cuts in a generation, as the coalition government seeks to reduce the country's ballooning deficit.

The announcement held few surprises for sector investors, but the tone of the spending review was broadly in favour of those companies the government needs in order to create savings.

"The rhetoric of the statement was focused on driving efficiency savings within government departments and ultimately the beneficiaries of today's statement would be the outsourcers," said Execution Noble analyst David Brockton.

Firms such as Serco (SRP.L) and Capita (CPI.L) have been tipped by several analysts to gain from the cuts in the long-term, as they are well placed to deliver the back- and front-office efficiencies Whitehall seeks.

Local authorities, which face a 7.1-percent cut in their annual budgets, are among the hardest hit by Osborne's axe, another outcome that is likely to benefit the private sector, which has already gained from decisions by some councils such as Suffolk to outsource the bulk of their services.

"More power to local authorities is likely to be good for outsourcers ... if they have to make things more efficient outsourcing is one way they can do that," Henry Carver, analyst at KBC Peel Hunt said.

Carver added that Capita, whose shares ticked up 0.2 percent to 739 pence each, was also likely to gain from the drive to reduce central government administration costs.

INFRASTRUCTURE BOOST

Serco, which runs prisons and is bidding to run the first hospital in Britain to be managed jointly by a private company and the National Health Service NHS.L, lost 0.8 percent off its shares to 620 pence each, trimming losses made in early trade.

"The overall cut wasn't as aggressive as originally thought. The NHS comment was the interesting one, and seeing productivity improvement," said Panmure Gordon analyst Andy Brown. "To do that they would have to involve the private sector in one form or another".

Mouchel, which recently gave a profit warning and is exposed to local authority spending, was down 0.7 percent but outperforming the FTSE index of British midcap companies .FTMC, helped by the government's commitment to major projects such as the widening of the M25 highway around London.

Shares in Atkins (ATKW.L), which recently made large redundancies to bolster investor confidence in its performance, and has suffered from a bruised construction market, were down 0.9 percent to 769 pence each.

(Editing by Jodie Ginsberg)

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