"Whilst we are clearly facing challenges and have experienced tougher conditions in recent months, we have still achieved £3bn of contract awards in the year to date and made further progress in our strategy of creating a broader and more balanced portfolio. The Group's opportunities in the large and growing markets in which we are represented around the world continue to provide good long-term growth potential. The UK Government audits and reviews are ongoing and we remain firmly committed to rebuilding the confidence of our UK Government customer."
Sentiment is very low and, as I talked about in my post FTSE-100 exit note in September (link here), the share has moved to below 475p today after the company updated the market inline with the cautious outlook predicted by last Sunday's edition of the Sunday Times. The warning itself was probably discounted, but investors were not impressed by the cautious comments with regard to 2014 and the likelihood of 'profits for 2014 being moderately lower than those for 2013'
So what to do? Clearly sentiment is very poor but, as the September link discussed, this is providing an opportunity. Serco is not broken - as the YTD contract awards show - it is just a question of what value investors place on the company today as it works through its profile re-birth under an increasingly new management team.
In the September note, I talked about 475p being equivalent to a single digit EV/ebit valuation. The above 2014 guidance updates may have changed this level by a percentage or two, but it has not fundamentally changed matters.
As per the below, 450p, then 400p should be the support levels. These are my add levels. Noteworthy too that the Serco yield now up to over 2.5%. Getting towards the level of a 10 year gilt (!)
Postscript: Serco shares closed at 418p. Time to get greedy.
Also worth reading this piece in today's FT. I like the use of the words 'grovel' and 'indispensability'. Correct combination.
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