BUSINESS SERVICES: This 1st edition of our annual accounting review, we take a deep dive into the audited accounts of 26 companies in our universe. We think this is timely, given the sharp share-price declines seen at G4S, Capita and Serco in the past few years following accounting re-statements. Companies that screen well are Experian, Robert Walters and Rentokil all benefit from flexible operating leases, with Experian and Robert Walters enjoying good cash conversion and a consistent approach to exceptionals. Companies that screen poorly include Bureau Veritas, SGS and Aggreko. We also note a lack of disclosure at Bureau Veritas and SGS.
Which stocks screen poorly?
* Bureau Veritas – A lack of disclosure (auditor focus areas and accrued/deferred income), weak cash conversion and frequent use of exceptional charges are the key negatives.
* SGS – Like Bureau Veritas, a lack of disclosure (auditor focus areas and accrued/deferred income) and frequent use of exceptional charges are the key negatives.
* Aggreko – The company changed its depreciatin policy in the year (FY16) (which provided a 5% PBT tailwind), suffered from lengthening debtor days and subsequently FCF conversion, and recorded heavy exceptional charges and high accrued income levels.
Which stocks screen well?
* Experian – A low pension deficit, positive operating lease exposure, good cash conversion and consistent exceptionals and provisioning policies enhance its accounting quality, in our view.
* Robert Walters – Strong cash generation in the year, a flexible operating lease policy and a lack of exceptional charges enhance the earnings quality at Robert Walters, in our view.
* Rentokil – Having undertaken a business review and implemented changes, Rentokil now benefits from flexible operating leases, a good average age of its assets and a strong pension surplus.