Boring Bernie
21 Nov 2014
Re: Free fall HardboyRe "Their latest release predicted profits this year (after financial corrections) of £130-140m. That's an EPS of around 20p, which puts the current share price at a PE of under 9, which is cheap for a profitable company."That's only part of the story though. They aim to raise up to 550 million early next year. Even if that money was raised at say 160p a share, that would mean there'd be another ~ 340 million shares in circulation, giving something like 890 million in issue. In itself that takes eps down to ~ 14.5p, giving a PE at a sp of 165p of ~ 11.in reality it looks like the market is pricing in something closer to 120p / share for the placing. Run it through the same calcs and you get an extra 460 million shares; 1010 milion in total; eps of ~12.8 and a PE of ~ 13.Medium to long term, will 550 million be enough ?Given the fund raising, cash flow and uncertainity over profits in the next few years, it's hard to find a reason to buy Serco at current prices and I fear the shorters are going to win on this one for a while yet.
II Editor
21 Nov 2014
NEW ARTICLE: Is It Time To Sell Serco Group plc? "Troubled outsourcing company Serco Group (LSE:SRP) is in the news once again today, as uncertainty surrounds the troubled group's cash call, which was announced at the end of last week. In particular, Serco pre-announced last week that it ..."[link]
gamesinvestor
21 Nov 2014
Re: Free fall HB - You are correct in that the headline numbers still show a positive but declining operating profit.What I should have said, and I stand corrected if it's misleading, is that the cash flow position is effectively resulting in a loss. The company inflow of cash has collapsed and it doesn't look like it can recover this without a cash injection (Rights Issue or otherwise) and I think this is the killer for the company right now.Also the projected profits are possibly, and I don't know of course, very flaky indeed as anyone of the companies it supplies to could cancel or walk away -- I'd be surprised if any of these contracts are devoid of break clauses given the nature of the businesses and the risks involved in poor delivery.It's a lot easier for me to be a little over critical, as I'm not a stock holder but I was nearly so a year or two ago (narrow escape I suppose).Games -- Clearly I wouldn't buy this stock now and I sympathise with existing holders as it's always a difficult decision to walk away. But the premise behind this is that it can be turned round, not impossible but maybe money is better deployed on something that has a business that is already heading north.
Hardboy
21 Nov 2014
Re: Free fall Games, your analysis is usually very thorough, but you've confused me slightly here. You say: You say: "The company is lossmaking and is projected to be so for some considerable time"Serco say: "Forecast for 2014 Adjusted Operating Profit reduced by approximately £20m to £130-140m (before the impact of the Contract & Balance Sheet Reviews); outlook for 2015 reduced."An operating profit of £130-140m is not loss making.
Hardboy
21 Nov 2014
Re: Free fall Games:"It's image is so tarnished"Well they've not killed prisoners on transport nor taken on contracts then said sorry we can't staff it like G4S, and they are still going strong.
Hardboy
21 Nov 2014
Re: Free fall Hard to tell.As we all know short term price movements are driven by emotion, not rationale. And Serco is currently completely unloved and the prognosis for the next 1-2 years is not great.However, I think a longer term view is encouraging. Everybody left in the company knows they have to be cleaner than clean in running their contracts and financial reporting. They still have an amazing visibility of future income (an order book worth around 3 year's turnover) they are still profitable; and they have a CEO with a great track record at Aggreko (which does not necessarily mean success here of course.) They also have a clear focus on the forward strategy.Their latest release predicted profits this year (after financial corrections) of £130-140m. That's an EPS of around 20p, which puts the current share price at a PE of under 9, which is cheap for a profitable company.We know there will be a rights issue, and it could be the price is already moving down in anticipation of how dilutive this will be. I am beginning to think it may be even more severe than I previously predicted - similar to the Lloyds one a few years ago - maybe 5 to 1 at 20p. I don't think Soames would have released the update if he believed there were any more significant skeletons in the cupboard, so I would be surprised if we get any further major bad news in the near future. The outlook for 2015 will be the key to things I think. I'd be amazed (unless there is further bad news, or we get a really bad prediction for 2015) if the price dropped as low as 120, and my guess would be it will begin to stabilise somewhere just above 150, but you never know. There's certainly a lot of short term trading going on right now.
gamesinvestor
21 Nov 2014
Re: Free fall Earl,I guess there is no bottom in that there is a possibility the company could go bust. It's net debt is very big and there is a need to raise capital. The company is lossmaking and is projected to be so for some considerable time. The capital will need to be further diluted to keep the show on the road. It's image is so tarnished, that it is questionable how well positioned it will be going forward with a lot of potential customers gazing at it and thinking about the consistent operational failures.I think you have to put yourself in the position of a commercial customer or a government department wanting to pay for a service and thinking, is this going to damage my commercial business or am I going to lose my job if this goes wrong.Soames is probably a very admirable chap and did well at Aggreko, but the businesses are very different. Aggreko had the market to itself almost for years and the business grew well with a fairly unique product which is now experiencing competition. Serco is one of many service providers who's success relies not on a unique product but a service with very thin profit margins, a reputation of good deliver which has been ruined, and with no real moat or barrier to enter for the business.I would sell, take what ever money you can get out of it and put it into something with a really strong franchise.Games -- well that's my 2 penneth worth anyhoo!!
The Earl of Acol
20 Nov 2014
Free fall Does any one have a handle on where this may bottom out? Not prepared to catch a falling knife but at some stage this should be worth buying back. Given forward contracts I wonder at what level a takeover approach may occur.
