Shares in outsourcing firm Serco Group (LSE: SRP) surged 10% higher this morning, after the firm increased its trading profit forecast for the year by 30%.
The company’s previous forecast was for an underlying trading profit of £50m in 2016. That figure is now expected to rise to “not less than £65m”. This progress is the result of a number of one-off contractual gains, plus certain cost savings running ahead of schedule.
In my view today’s news confirms the growing momentum of Serco’s turnaround. However, the firm’s revenues have fallen by 38% since peaking at £4.6bn in 2011. It’s also not clear whether profit margins will ever return to historic levels.
Serco shares currently trade on a 2017 forecast P/E of 47 and offer no yield. It’s clear to me that chief executive Rupert Soames needs to deliver both sales growth and higher profit margins to justify further share price gains.
It’s a big challenge, but today’s figures suggest to me that Mr Soames may succeed. In my view Serco remains a long-term buy.
Will more cash be needed?
Shares in equipment hire firm HSS Hire Group (LSE: HSS) fell by more than 5% this morning, despite the firm’s assurances that first-quarter trading was in line with expectations.
I suspect that investors selling the shares this morning are concerned about the group’s debt situation. The firm announced the appointment of a new chief financial officer today, alongside news that its net debt rose from £218m to £234m over the last three months.
Based on the firm’s 2015 results, this means that HSS’s net debt is worth more than the £183m value of its property, plant and equipment. The firm’s net debt of £234m is also nearly 20 times this year’s forecast profit of £12m.
These figures suggest to me that HSS could find it difficult to repay or refinance its borrowings. A rights issue or placing to make the firm’s debt more sustainable is a definite risk, in my opinion.
For this reason I don’t think HSS is an attractive buy at the moment. The shares could have further to fall.
Could this one double?
Mining royalty firm Anglo Pacific Group (LSE: APF) buys stakes in other company’s mines in exchange for a slice of future revenues. The firm’s business has been hit hard by the mining downturn, but I believe Anglo Pacific’s fortunes could soon start to improve.
The company said today that first-quarter trading was in line with expectations and that royalty income was expected to rise sharply during the second half of this year, as it did last year.
Prices for two of Anglo’s main commodities, coking coal and vanadium pentoxide, are starting to recover. The firm also believes its royalty deal with uranium miner Berkeley Energia could be worth $10m more than its recorded value, based on a recent deal between Berkeley and another party.
The big question is whether Anglo’s earnings will recover fast enough to allow the firm to maintain its planned 6p per share dividend. This currently provides a forecast yield of 8.2%. A yield this high is always risky, but even if the payout is cut I think Anglo Pacific could do well from here.