Outsourcing firms including G4S and Serco get a boost as Osborne removes VAT charges for bidding: G4S and Serco both saw a boost to their share price after the Chancellor removed VAT charges for private contractors when bidding for taxpayer-backed work.
Outsourcing giant Serco has been plagued by a series of huge disasters that has conspired to wipe almost £3.5 billion off the value of the company, and seen the shares tumble by more than 70% during the past 18 months. The best example of how it all went so wrong is Serco’s contract to maintain the Australian Navy’s fleet of patrol vessels. The boats entered service in 2007 and all was going well until there was a large increase in the number of illegal immigrants attempting to reach Australia’s shores in 2009. Suddenly, the patrol boats were pushed into service around the clock, and in harsh open seas that stressed them to their limits of their design. So, while Serco may have “confessed our sins” as Chief Executive Rupert Soames put it as he unveiled the company’s annual results, there is very little it can do to prevent it happening again. Serco took £745 million in charges for across all its contracts last year. Serco is now seeking to plug the hole on its balance sheet and stay afloat through a deeply discounted one-for-one rights issue at 101p, or a 51% discount to the previous day’s close and a 34% discount to the theoretical ex-rights price of 154p. The outlook is made even more uncertain by a shrinking order book. Serco said the work in hand fell from £13.6 billion to £12.6 billion at the end of December. Shares in Serco are trading on 23 times forecast earnings, making them overvalued for a company where revenue and profits will fall for the next two years. The shares pay no dividend and debts will continue to rise after the rights issue as cash goes out of the door on loss-making contracts. Serco at 183.70p-22.70. Questor Says “Avoid”.
Rupert Soames, the new Serco Chief Executive, aims to shore up an unwieldy global outsourcing business. He promises to focus on the most profitable bits while righting the balance sheet. On Thursday, the company announced a £555 million cash call, well telegraphed beforehand, alongside full year numbers. The shares fell 12% all the same, on top of the 55% they have lost in the past year. Post rights, the share count will double, lifting Serco’s forward price/earnings multiple to more than 30 times. The market, in other words, anticipates an earnings surge. A return to the 10-year average multiple of 17 times would require earnings to double. Mr Soames says that with pretax margins depressed to two%, returning to an industry standard of five% would achieve just that. This helps, but the company is still set to burn about £200 million in cash this year. While £80 million of the equity raised could offset part of that, the rest must come from cutting overheads — corporate costs exceed £50 million — and putting in fully centralised buying systems. Too much of Serco generates a low margin from steady-as-you-go business. That can be improved
below £1? of course they will. They have already traded at £1.45 pre rights issue. Since then things haven't improved much in terms of outlook. Therefore I fully expect the SP to be alot lower than £1.
if you look back on the chart there is a massive gap. There is a theory that gaps always close. To do that with Serco the price would have to go to approx 2.80. Serco was picked in The Fleet Street Letter as a recovery stick. I believe last week Credit Swiss changed the rating to neutral and a price target of 2.08
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