The Investment Column: Serco
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Your support makes all the difference.EVEN AS Serco confirms its reputation as one of the market's most reliable growth stocks by posting a 20 per cent rise in profits, executive chairman Richard White is refusing to commit the group to growth targets. But that doesn't bother the City.
The shares, which suffered from the market's new-found infatuation with cyclical stocks earlier this year, almost touched their all-time high of 1,600p yesterday. Has the market got carried away?
Serco delivers engineering and business services through private finance initiative (PFI) and public-private partnership (PPP) contracts. The British business is dominated by defence and transport - it has a contract to supply Railtrack with the trains which remove leaves from the track. Although the UK accounts for 60 per cent of turnover, Mr White sees scope for more business here. Serco's PFI order book already totals pounds 1bn. It's now eyeing up the proposals for partial privatisation of the UK's air traffic control network.
While the UK orderbook alone might not guarantee that Serco will continue to deliver earnings growth above 15 per cent, the group sees opportunities in other markets.
Near-term, Asia and Australia is a source of more defence contracts. Meanwhile, North America shows signs of adopting the more complex PFI contracts found in the UK. Serco considers these its strength but it is up against stiff competition and recently lost out on one US contract to WS Atkins, its UK rival.
Analysts expect pre-tax profits of around pounds 31m and earnings of 33p this year, putting the shares, up 92.5p at 1,592.5p yesterday, on a forward p/e of 48. Serco's earnings' record and 90 per cent success rate in renewing contracts seems to justify the rating. But any further bad news on contract losses could dent the shares. This could be a good time for investors to take profits.
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