Good morning, it's Paul here!

To get you started today, here is the link to yesterday's completed report. I added new sections on Filtronic (LON:FTC) and NWF (LON:NWF) in the evening (EDIT: extra bits added re NWF, after talking to an adviser to the company, who helped me with understanding the business model)

On to today. I see that yet another outsourcing company has run into trouble. Capita (LON:CPI) this time. The RNS today says that it needs to raise c.£700m in a Rights Issue, has suspended divis, and is to make non-core disposals, and cost savings. It's become too big & complex. I don't know the company at all well, but it seems to me there are 5 clear lessons to be learned from Carillion, Capita, and previous failures in the outsourcing & support services area;

  1. It's a lousy area for investors, unless the business is focused in a specialist niche area, and is very well managed.
  2. Operating a group with a weak balance sheet, loaded up with debt from acquisitions, is very often an accident waiting to happen.
  3. Contracting businesses often mess up contracts in one way or another. This is bound to happen, as offering to build something large, or provide a complicated service for multiple years, is fraught with risk. Yet contractors often under-estimate the risks & costs, in order to win the contract, sometimes at an uneconomically low price.
  4. Investors are often sucked into shares in this sector due to a high dividend yield. Companies with weak balance sheets, lots of debt, and paying big divis are an accident waiting to happen. I only go for high yield shares if the balance sheet is bullet-proof.
  5. The accounts in this sector cannot really be relied upon. Reported profits often turn out to be illusory, once problems with contracts later emerge.

Overall then, my resolve is stiffening to avoid this sector like the plague.




Best Of The Best (LON:BOTB)

Share price: 255p (unchanged today, at 11:31)
No. shares: 10.12m
Market cap: £25.8m

(at the time of writing, I hold a long position in this share)

Interim results - for the 6 months ended 31 Oct 2017

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