Wednesday tips round-up: Serco, RM2 International

13th Aug 2014 10:04

Outsourcing specialist Serco's latest set of half-year results make for grim reading. On the positive side of things, the company seems to have its eye on the ball, improving its return on capital employed. Auspiciously, if one is optimistic, its new chief executive Rupert Soames - the ex-boss at Aggreko - did just that at his previous stint. However, until next March investors will be none the wiser about just how he intends to go about that, the Financial Times' Lex column points out. Meanwhile, and as the results show, the company's profits have been collapsing while Serco has lost eight major bids so far this year and won only two (out of a pipeline of 40). A recent placing has given Soames some breathing space but even then net debt is expected to hit three times operating profits by the end of the year. Further bad news on contracts cannot be ruled out either. In exchange, investors are being asked to pay 19 times forward earnings for the shares. That is well above the five-year average, the Lex column said. Despite its troubles since floating in January pallet manufacturer RM2 International has managed to attract some of the market's most renowned investors of late. It came to the market at 101p but by the time of its annual results on 16 June, the shares were trading at just 54p. Despite this, Britain's best-known value investor, Neil Woodford, purchased 24m shares in the firm though his new fund Woodford Investment Management. That equates to 7.5% of the company's shareholders' equity. As well, the company has brought on board two high-profile directors, former Diageo chief Paul Walsh and ex-Marks & Spencer boss Sir Stuart Rose, The Daily Telegraph's Questor team said. However, last year the company saw its losses before taxes balloon, in large part due to a $40m payment to settle warrants issued to private investors. Despite the confidence in the shares, Questor believes that it cannot recommend them "with such expensive debts until a set of clean results appears". So 'sell', the tipster tells readers. Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB