Tempo's polished profit

Tempo Services. The rich bloke is John Schaeffer, who owns 32% of the company. The workers doing it tough are his employees.

Schaeffer is the boss of 20,000 staff, most of whom are cleaners or security officers, although the company also manages a courier operation, catering and a facility management service.

Tough industry

Of course, anyone can clean or watch security cameras but a 23% rise in the company's share price since issue 80/Jun 01 (Buy - $2.13) suggests nobody does it better than Tempo.

This, after all, is a tough industry - there aren't any patents or great technological leaps to protect a company's competitive advantage.

So how has Schaeffer managed it? By spotting a trend long before anyone else and riding it for all it's worth. That trend is outsourcing. Just as more people are paying others to mow their lawns and clean their houses, companies are thinking along the same lines.

Tempo offers big organisations a ready-made and experienced workforce to take over the dirty work, except perhaps at Clayton Utz.

With a growing range of services Tempo is a one-stop shop that companies love. Tempo is winning more big contracts and, importantly, holding on to those it's already got.

Competitors are finding it tough. So tough, in fact, that they're selling out. And guess who's buying? Early last year, Australia's third largest commercial cleaning services company, Prestige Property Services, was snapped up by Tempo.

This was a key contributor to a 41% lift in revenue to $306m and 46% increase in profit to $5.7m for the December half. The gross profit consisted of 68% from cleaning and building services, 28% from security and 4% from facility management and other services.

Government contracts

Many of Tempo's big, long-term contracts are with government departments so criticism of the company's well connected board is understandable. Having former NSW Premier Barry Unsworth batting for your team must open a few doors. But while competitors are complaining, shareholders aren't.

In the past six months there have been more contract successes. The property service contract for Telstra, worth $12m a year, has been extended another five years. The NSW Department of Public Works and Burswood casino are examples of other recent deals.

This company is on a roll and subscribers looking for a slice of the action are being asked to pay a hefty price. Despite consistent dividend increases the company is only yielding 2.5% and, with a PER of 19, there's not a huge margin for error.

What, then, could go wrong? A fall in the rate of new contracts and renewals in existing contracts is the major risk. It's very, very difficult to improve your contract renewal rate when it's already running at 95%.

Debt levels have also been a concern and, despite dropping, the net debt-to-equity ratio is 72%. The performance of health and catering, which delivered earnings before interest and tax of just $0.3m on $21m of revenue, is clearly not doing well but is unlikely to undermine the group's performance.

We'd love to make a more decisive recommendation but Tempo's share price militates against that. There's less obvious value now than there was at the time of our original buy call.

But we're not going to bet against this great management and business either. As we said in issue 100/Apr 02 (Hold for the Upside - $2.72), HOLD FOR THE UPSIDE.