Yahoo Finance Questor: Serco has improved out of all recognition but investors will still need to be patient
Support services group Serco is almost unrecognisable from the company first assessed by this column more than five years ago, at least if last month’s full-year results are any guide.
This is of great credit to the chief executive, Rupert Soames, the board and the company’s staff but frustratingly has yet to bring capital rewards to us, as the shares trade below the levels of early 2017. The fault lies with us, not with the company, as we overpaid for access to the turnaround in the company’s fortunes and shall simply have to remain patient.
And patient we can afford to be, for three reasons.
First, after a lengthy fallow period Serco has now paid a dividend for two years in a row. The final payment for 2021 of 1.61p a share, due on June 7, takes the total distribution to 2.41p, up from 1.4p in 2020. Further increases seem likely and in a further gesture of confidence Serco is launching a £90m share buyback programme.
Second, the company’s ability to return cash to investors reflects its improved finances. Net debt is barely £180m before leases while interest cover is approaching 10 times.
Third, order intake last year was £5.5bn, well ahead of annual sales of £4.4bn, so visibility is good. Serco also continues to bid sensibly to ensure the new business flow generates acceptable margins. The operating return on sales, at 5.2pc, is more than double the levels of five year ago and management continues to target further improvement to 6pc. The combination of higher sales and higher margins should mean higher earnings.
Challenges still lie ahead. Like many employers Serco may find itself facing calls for higher pay from staff, at least if labour markets stay tight, although at least many of the FTSE 250 company’s contracts feature a degree of indexation and that provides some margin protection.
In addition, Serco’s sales and profits are expected to dip a little in 2022, since the company was in the front line when it came to helping governments at home and overseas to provide Covid-related services. Management estimates that some £60m of Covid-related operating profit from 2021 will not recur in 2022.
However, the valuation looks relatively undemanding, judging by a forecast price-to-earnings ratio of barely 13 and a yield north of 2pc. That offers the right balance between protection against falls and potential for gains, especially when coupled with the solid balance sheet and powerful cash flow.
We’ll stick with Serco.
Questor says: hold
Ticker: SRP
Share price at close: 133p
Update: Springfield Properties
A healthy order book, strong momentum in planning permission for new-build homes and a dividend increase all suggest that last week’s first-half results from Scottish house builder Springfield Properties neatly support the foundations of our investment case outlined in January.
Rising sales from affordable homes and initial revenues from private sector rental properties also show the benefits of the company’s strategy to develop new revenue streams. The acquisition of Tulloch Homes provides a further leg to the growth story, especially as it boosts Springfield’s position in the Scottish Highlands, where demand for quality dwellings remains strong.
Indeed, the entire housing market in Scotland feels well underpinned, a trend evidenced by double-digit percentage house price growth. Under those circumstances it is easy to see why the board is sanctioning a 15pc increase in the interim dividend to 1.5p a share and remains confident that the Aim-quoted firm will meet analysts’ consensus forecasts for the year to June, which are for mid-to-high-teens percentage increases in sales, pre-tax profits and earnings per share.
Such near-term momentum, and long-term potential, suggest the valuation remains attractive, based on a forecast price-to-earnings ratio of around 9 and a well-covered dividend that equates to a yield of more than 4pc.
Moreover, the £166m market value compares with shareholders’ funds, or net assets, of £113m. A multiple of 1.5 times historic book value is not excessive, especially as rising earnings mean that the net asset value should rise over time.
Springfield is building momentum. Hold.
Questor says: hold
Ticker: SPR
Share price at close: 140.5p
Russ Mould is investment director at AJ Bell, the stockbroker
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