It’s a surprise that Serco is a FTSE 250 company — if market value were measured by press coverage and controversy it would surely be a FTSE 100 contender. That is perhaps inevitable for an outsourcing company that does “on government’s behalf, some of the hard things that citizens expect their governments to do, like deport some people and hold others in prison”, as Rupert Soames, chief executive, said this year.
Serco is not just high profile, it is also a very large company. It made revenues of £3.88 billion in 2020 and employs more than 50,000 people in the UK, Europe, North America, Asia Pacific and the Middle East. In addition to prisons and deportations, the company carries out government contracts from maintaining aircraft for the RAF and running air traffic control at Dubai Airport to collecting bins and issuing parking tickets.
Serco was a member of the FTSE 100 until 2013, when its share price tumbled amid fraud allegations. A series of profit warnings sent them lower again, and Soames took over in 2014 to turn the company around. This has been a lengthy task — last week, shareholders received their first dividend payout, of 1.4p a share, since 2014.
The shares have never come close to their peak of more than 500p in 2013; the highest they have climbed in the past five years was 167¾p in January 2020. They have yet to regain that pre-pandemic level, and closed down 2½p, or 1.8 per cent, at 134½p last night.
Going by the share price alone then, the company’s progress looks limited. However, its performance paints a much more optimistic picture. In February, the company reiterated its modest ambition of being “a more normal company”, with profit margins of about 5 per cent and revenue growth of 5 per cent, by “quietly and diligently serving governments, avoiding risks and losses, and repeating to ourselves the mantra that ‘no deal is better than a bad deal’ ”.
The company first set the margin and revenue targets in 2020, but its plans were derailed by the pandemic. Nonetheless, margins widened from 3.7 per cent in 2019 to 4.2 per cent last year, as revenue rose by 20 per cent. Pre-tax profit climbed 90 per cent to £153.3 million. Serco also said it had repaid £2 million of furlough support from the UK government and reinstated the dividend.
Part of the reason for Serco’s lengthy turnaround has been the drag caused by unprofitable contracts from the past. One such deal to provide accommodation for asylum seekers had been losing about £15 million to £20 million a year but is now profitable under a new ten-year contract that started in 2020. The company identified £447 million of loss-making onerous contracts in 2014, of which only £15 million remain.
Serco makes three quarters of its profit outside the UK and of the five acquisitions the company has made since 2014, three have been in North America and one in Australia. Most recently, Serco agreed to buy WBB, an American defence engineering and services company, for $295 million in February.
Serco has raised its profit forecast for 2021 to a 10 per cent increase at constant currency. Analysts at UBS raised their price target to 165p in April, rating the shares a “buy”.
Looking ahead, Serco believes it stands to benefit as government customers worldwide look for ways to offer services more cheaply as they grapple with the large deficits built up during the pandemic. The company has spent the past seven years re-establishing a sound financial footing, and with the dividend reinstated, this looks like a good time to buy.
Advice Buy
Why Dividends are back, margins are increasing and governments will turn to outsourcing as they seek to repair the public finances
WPP
The advertising and marketing group’s shareholders have had a turbulent ride in recent years. WPP’s growth stalled, founder and boss Sir Martin Sorrell departed amid a misconduct investigation, it struggled to manage a sprawling corporate structure and debt was too high.
While it was getting a grip on the shift in advertising budgets to digital channels and the need to streamline the organisation and reduce its debts, the pandemic struck and wiped out WPP’s clients’ marketing budgets. The company reported a £2.8 billion pre-tax loss for 2020, hit by write-downs on the value of companies it had acquired in the past, and its shares have almost halved since 2017 when they were trading at £19.
However WPP has steadied the ship under boss Mark Read, and revenue bounced back in the first quarter of 2021, with like-for-like sales up 6.3 per cent to £2.89 billion. Investors have noticed — the shares have added 40 per cent in the last year and climbed 23 per cent since Tempus rated the shares a “buy” in January. They closed at £10.04 yesterday, up by 7p, or 0.7 per cent.
WPP won newh business worth$4.4 billion (£3.12 billion) in 2020, from clients including Intel, HSBC and Unilever, and in 2021 it has started campaigns for Absolut vodka and JPMorgan Chase, among others. The company is making small acquisitions to expand its digital communications services, and set up a new data company to work with all divisions of WPP.
In the past two years, WPP has sold more than 60 shareholdings and businesses to raise over £3.5 billion, merged 100 smaller offices and closed 80 business units altogether. In total, it reduced net debt from £4.9 billion in September 2018 to £700 million by December 2020.
WPP also reinstated its dividend for 2020, and restarted a £620 million buyback programme, after suspending 2019’s final dividend and the buybacks in March 2020.
Given its key markets are recovering strongly from the impact of the pandemic and the self-help measures it has taken since 2018, the rally in WPP’s shares looks like it has further to go and Tempus maintains its ‘buy’ rating.
Advice Buy
Why WPP is tackling its internal challenges and the economic outlook is improving
