Rupert Soames, chief executive of Serco, says his “shit-o-meter hasn’t pinged in almost a year”. That might not have quite the rhetorical elegance of his grandfather Winston Churchill, but the message is clear. The shocks that shook the outsourcing group two or three years ago seem to be dying out.
They haven’t disappeared entirely and Serco is certainly still on probation with some public sector clients but Mr Soames is getting more of a grip on the business, following the scandal of charging the British taxpayer for tagging non-existent prisoners in 2013. He’s also ended many lossmaking contracts signed up to by the previous regime at Serco.
Costs are being cut, debt is down, cashflow has turned positive. And, for the second time this year, Serco has had to alert the stock market that its profit this year will be greater than expected. Mainly because of the weaker pound, which magnifies profits made overseas, Serco is on course to make more than £80 million this year.
The turnaround plan looks a lot more assured than in March last year, when shareholders were persuaded to pour in £555 million of new capital at 101p per share in a rescue rights issue. Since then, the shares have drifted as low as 77p, but yesterday surged higher to end the day at 133p.
Serco is again winning new contracts including for healthcare services in the UK, prisons in Australia and radar site protection in the US. It is also confident that Brexit should provide it with as many opportunities as misses. And its bid pipeline is expanding.
The danger is it again starts to bid too aggressively for contracts, which then prove unprofitable. Its recent failure to get to first base with a bid to take over Hebridean ferry services was reassuring in that regard.
Governments are still for the most part highly borrowed and will be in no mood to splash the cash. Brexit may delay British ministers and civil servants in coming up with new areas of work to farm out.
Profits in 2017 are still going to fall, the company says, which means that its share market rating in the medium term will get higher. It’s on a price earnings ratio of 30 for this year, rising to almost 60 for 2017. And for now there’s no dividend at all. Shareholders will need to be patient. The long-run upside is considerable, but any quiver in Mr Soames’s shit-o-meter and the shares would be punished.
My advice Hold
Why Good progress but share price recovery is getting ahead of the facts
Brammer
Brammer is one of those investment disasters that at some point must provide a buying opportunity. Shares in the ball-bearing supplier have dived from 500p two years ago to 95p today. Bottom-fishers wonder whether now could be the time to buy in.
They should curb their enthusiasm. Adverse exchange rate movements have pushed Brammer uncomfortably close to breaching loan covenants. The company’s debt has grown to £108 million and leverage at 2.8 times compares with a 3.0 times ceiling. The pension deficit has worsened to £39 million.
A campaign to reduce its mountains of stock is succeeding but only at the expense of margins. Meanwhile, its big new idea, vending machines, is looking sickly and is being pared back. Overall group operating profit has halved and the interim dividend has been scrapped.
It’s hard to gauge the likely success of any new turnaround plan. The new chief executive, Meinie Oldersma — only days into the job — is not confident enough to make public pronouncements yet.
The shares trade on 18 times expected profits this year, though this in theory falls to just nine next year if Mr Oldersma can work some magic.
My advice Avoid
Why Too much debt, too much doubt, not enough information
RSA
Stephen Hester has laboured hard, but for scant reward so far. The RSA chief, two and a half years into the job, posted promising half-year results yesterday. Underlying earnings per share are up 29 per cent, underwriting profit was up 72 per cent and the half-year dividend was lifted by 43 per cent.
The RSA share price, however, at 505p, is virtually unchanged on the level it sat at when he arrived in February 2014. And it is well below the 550p offered by Zurich last year, before the Swiss insurer changed its mind and retreated.
There were some headwinds in the half-year. Weather and large losses were £59 million worse than expected. RSA also took a hit from the Alberta wildfire and continental floods in June. But it has so far failed to command the investor re-rating it perhaps deserves.
There is still time to convince the doubters. Mr Hester now expects to beat his target of £350 million in annualised cost savings by 2018. He believes his emphasis and investment in customer service will feed through into lower churn. There’s also the post-referendum slump in the pound. It came too late to boost RSA’s first-half profits but in the second half the profits of its big Canadian and Scandinavian offshoots will be boosted once translated into sterling.
Barrie Cornes at Panmure Gordon has RSA as a “hold”. There’s a fair chance of a bidder coming along, but RSA still doesn’t look cheap. It trades on 15.8 times prospective earnings and yields 2.9 per cent. Compare that with Aviva — on a 7.8 times multiple and yielding 6.1 per cent.
My advice Hold
Why Takeover hopes tempered by a full valuation
And finally . . .
Communisis, the printing and marketing group, posted a 37 per cent rise in first-half profits before tax to £4.4 million and a 10 per cent boost in the dividend to 0.81p. New client wins include Liverpool Victoria and a healthcare firm wanting marketing help in the Middle East. Overseas revenues have climbed to 24 per cent of sales from a standing start five years ago. Yesterday’s base rate change is good news. Communisis prints rate-change letters going to customers of HSBC and Lloyds. The shares pushed 9 per cent higher to 37.75p.
