The Investment Column: Future's looking bright for Serco

Costain attempts to control risks - Let Ocean Power wash by for now
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The Independent Online

Nemesis usually follows hubris, as Rentokil well knows. Its former boss, Sir Clive Thompson lost his title of "Mr Twenty Per Cent" after faltering in his quest to squeeze extraordinary growth from a decidedly ordinary set of businesses.

Nemesis usually follows hubris, as Rentokil well knows. Its former boss, Sir Clive Thompson lost his title of "Mr Twenty Per Cent" after faltering in his quest to squeeze extraordinary growth from a decidedly ordinary set of businesses.

So is Serco the new Rentokil? It has quietly but purposefully expanded from running the UK's four-minute nuclear attack warning system to a huge range of outsourced services, and from managing schools in Walsall to providing support services for the European Organisation for Nuclear Research.

Its record on earnings growth does not match the best of the old Rentokil, but it has been consistent. Yesterday it unveiled another 18 per cent rise in halfway earnings per share to 6.09p, on profits before goodwill amortisation 17 per cent up at £36.5m. And the clarity of its prospects is probably unparalleled.

The order book of £10.3bn at the end of June represents 6.5 times last year's turnover, with another £2.6bn of "preferred bidder" business still to come. That means that not only most of this year's and next year's sales are in the bag, but three-quarters of those for 2006 as well.

The continued financial squeeze on governments is the perfect background for Serco. Its ability to offer cost-savings puts it in prime position to take an ever increasing slug of the £300bn or more spent annually on public services. And it has now moved just as purposefully into railways. Its victory in winning the north of England rail operating franchise with the Netherlands' NedRailways represents its biggest contract yet.

It is hard to see where Nemesis will come for Serco. With mid-teens growth expected to take earnings per share to 12p in the full year, the shares, up 8.25p at 207.25p, are on a forward multiple of 17. About right.

Costain attempts to control risks

Costain has been a stunning success since it was rescued by a multinational coalition of Malaysians, Kuwaitis and Americans in the late 1990s. The earnings and the share price are about four times the level at their trough in 2000.

Yesterday, the engineering and construction group was delivering more of the same. Profits leapt by a third to £8.1m in the six months to June on turnover 15 per cent up at £340m. And, like Serco, it boasts an impressive order book. Taking in a couple of contracts with Thames Water and Yorkshire Water announced today, the group's forward workload amounts to more than £1.1bn.

Certainly, some of the half-year's bottom line growth came from near-tripled operating profits at the joint-venture property developer in Spain. Returns there are inevitably lumpy, but should continue for years.

In the meantime, the group's push into water is bearing fruit. It is well placed to scoop up work for five of the seven water utilities currently putting out tenders for the next five-year regulatory period, starting in March.

Like private finance initiative work, the nasty provisions which so often tripped up construction companies in the past tend to be avoided in such deals by greater openness with the customer. Costain says 85 per cent of its whole construction business is insulated from such threats, while the risk in oil, gas and process engineering side is small.

Carillion and Mowlem have said something similar in recent memory, only to be wrongfooted later by bad contracts. Costain looks more assured, but the shares, up 1.25p at 42.5p, are high enough on a prospective price-earnings ratio of 11.

Let Ocean Power wash by for now

As technology companies go, Ocean Power Technologies may have more going for it than most. Admittedly, that may not be immediately apparent to investors who bought into shares in the US developer of wave power technology at 125p on their AIM debut last October. Since then, the shares, up 5p yesterday, have slumped to 78.5p.

Then too, the company's announcement of its maiden annual results - an impressive net loss of $2.85m on turnover of $4.71m - was accompanied yesterday by a spectacular revenue warning. Sales expectations for this year have been slashed from $22m to $6.5m.

But trials of OPT's first power-generating buoy off the coast of Hawaii have been given the environmental all-clear. Also, Lockheed Martin of the US appears to be on the verge of validating the buoy for powering top-secret underwater sensor equipment. Potentially even bigger is a deal with the Spanish electricity group Iberdrola.

The company has hardly used any of the £22.4m it raised at flotation, but this is one to watch from the shoreline for now.

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