The Investment Column: Schroders' dream team could lift the shares higher still

Plenty in store at fast-expanding Serco - Buybacks and growth prospects make Hays a buy
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The Independent Online

Michael Dobson and Jon-athan Asquith, the chief executive and finance director of Schroders, were like the cats who'd got the cream yesterday, unable to disguise just how pleased they were with themselves after trebling group profits for the second year running.

Michael Dobson and Jon-athan Asquith, the chief executive and finance director of Schroders, were like the cats who'd got the cream yesterday, unable to disguise just how pleased they were with themselves after trebling group profits for the second year running.

Although, by their own admission, such growth is unsustainable, yesterday's results completed one of the City's most rapid and impressive turnaround stories, for which the pair deserve due credit. Since taking on what was a basket case three years ago, the pair have stripped out millions in costs, sharpened up their fund management team and started a crucial shift towards higher margin business. Although its lower-earning institutional mandates still account for some two-thirds of assets, its more lucrative retail division is now almost half of new sales.

The question is whether the dream team have what it takes to drive the business from recovery into its next phase of growth. With £759m of surplus capital waiting to be spent, Dobson is on the hunt for bolt-on acquisitions. If he is good to his word, there are to be no large deals with messy integrations. Meanwhile, the company appears to have a solid organic growth strategy in the development of its retail business, which should continue to drive profits in the interim.

The risk in the stock - as with any asset management business - lies in the fortunes of the equity markets. But with the FTSE 100 entering its third year of recovery since hitting its March 2003 lows, now does not look a bad time to be buying into this industry.

Dobson's enormous bonus (£1.8m in 2003, and sure to have been even higher in 2004) may also put some investors off. But so far his performance would appear to justify it.

At a valuation of almost 17 times last year's earnings, Schroders is not cheap. But with the wind well behind it, it can justify higher still. Buy.

Plenty in store at fast-expanding Serco

UK Governments have pioneered outsourcing to the private sector, and Serco is one of the more impressive of the companies to be managing vital services such the country's nuclear warning systems, national research labs, young offenders institutions, transport services such as London's Docklands Light Railway, and military and space facilities. You don't see it in the news much, which tells you a lot about how little it messes up.

And that in turn tells you why its underlying sales and profits keep growing at double-digit percentages every year and why 90 per cent of its contracts are continued and even widened when the time comes for re-bidding.

The business grows fast without the need for acquisitions but 2004 - for which Serco reported a pre-tax profit rise of 8.6 per cent to £57.4m yesterday - was a little out of the ordinary.

To keep things running at their current pace beyond the foreseeable future, it sold off businesses in New Zealand and Sweden where the governments are showing no sign of outsourcing any more big chunks of what they do.

And, most importantly, it made two acquisitions. In the UK, it bought ITnet, a computer services supplier to local authorities which will bring some of the IT skills Serco is lacking and must currently buy in. And in the US, it bought RCI, a big defence outsourcing specialist which is one of the biggest contractors to the Pentagon. That gives it the scale in the US to start - cautiously, of course - penetrating that vast market. Buy.

Buybacks and growth prospects make Hays a buy

It looks like Hays' decision to demerge its mail business and focus entirely on recruitment is paying off. Fees for placing temporary and permanent staff are growing at an annual rate of 17 per cent, and they are feeding through into profit growth more quickly.

Hays, which specialises in the accountancy and finance, construction and IT industries, looks well placed to benefit from the upturn in the market. It is expanding rapidly and has improved productivity, investing heavily in training and technology. The group opened 15 new offices in its first half and plans to open as many in the second half. It employs 3,440 recruitment consultants, up 14 per cent year on a year ago.

Recruiters were hit hard by a hiring slump during the global economic downturn but saw their business recover last year. Operating profits at Hays' recruitment business rose 28 per cent to £80.6m in the six months to December. The group's three regions - the UK & Ireland, continental Europe and Australia & New Zealand - delivered fee growth of 15 per cent, 32 per cent and 24 per cent respectively. Denis Waxman, chief executive, prides himself on this balanced business mix, between geographies and also between permanent and temporary placements. In good times, permanent does well but falls off the cliff in bad times.

The interim dividend was raised 13 per cent to 1.13p. With further share buybacks to come - Hays plans to return at least £200m to shareholders - and good growth prospects, the stock is worth a buy.

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