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Sunday share tips: Serco, Premier Technical Services Group

By Josh White

Date: Sunday 24 Jun 2018

Sunday share tips: Serco, Premier Technical Services Group

(Sharecast News) - In the Sunday Times' 'Inside the City' column, John Collingridge set his focus this week on outsourcing giant Serco, opening with Rupert Soames' appointment at chief executive four years ago and how that event gave the firm's shares a 10% single-day bump.
Soames - the grandson of Winston Churchill - was installed at the top of Serco in the wake of the ankle bracelet overcharging scandal, and quickly wrote down £1.5bn and asked shareholders for a £550m injection in a bid to turn the firm around.

At the time, he said the heavily discounted 101p-per-share cash call would allow Serco to "walk the path to recovery and repay the confidence and support shown to us by our shareholders and lenders".

However, four years later and that path was looking longer and more winding than anyone thought possible, Collingridge suggested, with the company's shares now floundering below that cash call price at 97p, giving it a market value of £1.1bn.

There was some hope in 2016 when the shares enjoyed what Collingridge described as a "partial rally", though that quickly eroded as the sector was dragged down by concerns around some of Serco's peers, including Carillion and Mitie.

And while Soames and his finance chief Angus Cockburn had instilled a strong sense of financial discipline in the company, it has come at a cost, with their steadfast refusal to pay over the odds for work seeing it lose a long list of tenders - the most recent being the £500m military fire and rescue contract, which was won by Capita.

Stagnation at Westminster has not been helpful either, with opportunities on these shores taking longer to work their way through bureaucracy and out to tender, and when they did, Collingridge noted that they are often at uneconomic prices.

Serco has been winning an increasing number of deals abroad, but it was still not enough to offset the drying-up of UK contracts, and as a result, its pipeline was £4.4bn at the end of January - a paltry figure compared to the £8.4bn reported a year earlier.

Debt, meanwhile, was moving inversely to contract momentum, having hit £141.1m in January with analysts at Peel Hunt expecting it to reach £250m this year.

According to Collingridge, Soames is "fed up" with the situation locally, and was now shifting his attention more and more to the Americas, Asia, the Middle East, and the rest of Europe.

He said he wouldn't be surprised to see "decent" first half profit growth this week, followed by a short-term spike in the share price.

Analysts at Jefferies recently said they thought a "token" dividend could possibly be restored, but not until 2020, with Collingridge adding that while Soames was making gains, progress remained "astonishingly" slow.

"As he put it in February, the road ahead is still 'long, and probably bumpy'," Collingridge wrote.

"The question is: when will Serco finally reach its destination? And will Soames have the patience to see out the journey?

"I wouldn't climb aboard yet. Avoid."

Over in the Mail on Sunday, Joanne Hart was back on her apparent favoured market - AIM - and one of its building services constituents - PTSG - for her 'Midas' column.

She noted that a recent fire in a Lewisham tower block saw 280 people successfully evacuated with the blaze brought under control within 90 minutes, contrasting that to the devastating Grenfell Tower fire a year ago, adding that the Lewisham block apparently benefited from a "highly efficient" sprinkler system installed by PTSG.

Shares in the company - also known as Premier Technical Services Group - had performed disappointingly in recent months, falling to 178p now from 207p in January, though according to Hart the decline was not reflective of long-term prospects.

PTSG is run by Paul Teasdale, who founded it in 2007 alongside chairman John Foley.

Neither were fresh faces in the sector, the pair having already made millions establishing and then flogging off specialist building services companies, with them both said to be keen to see the same for PTSG.

Their stated goal is to almost triple the company in the next few years and expand it to a £500m business.

Hart said the board was confident at its AGM last week, with Teasdale said to be "more optimistic than ever" about the company's prospects across its four divisions - access and safety, electrical services, building access, and fire solutions.

She said given each division involved "highly specialised" work with skilled employees and professional engineers, competition was less intense, leading to decent profit margins.

In many cases, PTSG was completing work that was mandatory under health and safety regulations, meaning customers were as focused on the efficacy of the work as much as they were the price.

And while all of its divisions carried out initial installation work, they often took on maintenance contracts lasting several years, Hart said.

She claimed its order books were "stronger than ever", as companies became more aware of their obligation to ensure adequate and safe fire protection in their buildings.

It saw a 35% improvement in revenue in its 2017 results to £53m, with underlying pre-tax profit ahead 36% to £10.2m.

Looking ahead, brokers were said to be eyeing up revenues of around £68m, with profits of £14m for the current year, as well as a 12.5% increase in the dividend to 1.8p.

"PTSG provides essential building services across the UK," Jart wrote.

"The company has more than 17,000 customers and looks after 150,000 properties so it does not rely on any individual business or sector for work."

She said Teasdale is "driven and ambitious" and the shares, at 178p, should "do well".

"A good addition to investors' portfolio, particularly for those looking for a long-term growth story."

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