Serco - suspended sentence

Serco: The group has had a terrible time of late with contract losses, poor trading and a schism in the relationship with key customer, Her Majesty’s Government. This led to the arrival earlier this year of the well-regarded Rupert Soames as CEO, from Aggreko. He has started to re-build the executive team and has now brought in his former Aggreko moneyman, Angus Cockburn, as CFO. Their reunion will greatly encourage Serco shareholders, as the group re-engages with HMG and other key customers. When Rupert Soames arrived, he very quickly launched an equity issue of 10% of the issued share capital, in order to buy himself time and breathing space. The deterioration in profits had meant that the Group’s leverage ratio, 2.25x at the end of 2013, was heading towards its 3.5x ceiling. Post the equity raise it is now 2.41x (net debt of £559m). Guidance for 2014 has been re-iterated, subject to a strategic review, with early pointers for 2015 suggesting another challenging year of transition. The strategic review, which is under way, should be complete in time for the full year results and a new finance man could mean that further contract write offs will be identified. So there is a good chance that a further equity raise will be required, to bolster the balance sheet and manage the key covenant limits. At these results the interim dividend was held at 3.1p, but the fate of the final is undecided to say the least. So shareholders can see that the building blocks for a recovery are in place. However, with Angus Cockburn only starting at the end of October, the ‘kitchen sink’ moment has not yet arrived. With a good chance of further equity being issued and a dividend at risk, there seems to be no rush, for all but the faithful, to commit fresh money just yet.

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.