Risky government contracts make Serco one to avoid

Helphire shares are worth hanging on to; Majestic's results are nothing to whine about; Trifast remains a hold in trying telecoms markets
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The Independent Online

Who are we? We run world-class scientific establishments, manage parking meters, and operate tourist attractions. We run prisons, test nuclear weapons, maintain railways. And much, much more. We provide services that range from the management of facilities, through to the construction of entire new businesses. Our product is the management of change. We design it and we deliver it.

Who are we? We run world-class scientific establishments, manage parking meters, and operate tourist attractions. We run prisons, test nuclear weapons, maintain railways. And much, much more. We provide services that range from the management of facilities, through to the construction of entire new businesses. Our product is the management of change. We design it and we deliver it.

We are Serco.

Serco is one of the most significant of the UK's support service companies, beneficiary in countless areas when the Government and its agencies decide that the private sector is better able to manage its facilities or its services.

Its very anonymity is testament to its ability in avoiding embarrassing mistakes. Compare its profile to that of Group 4 or, latterly, Jarvis.

Yesterday, the company was taking analysts to two of its sites where it is managing scientific work: the Norfolk & Norwich University Hospital and the National Physical Laboratory. It also issued a soothing trading update, which said things were progressing in line with market expectations. More than four-fifths of this year's expected turnover is already in the bag, and there are a continuing flow of new opportunities to bid for work, the company said.

The government outsourcing market has been growing at 10 to 15 per cent a year and, with probably less than 20 per cent of the opportunities so far exploited, there is little sign that this cannot continue for years to come. Serco is also pushing hard overseas.

Yet its shares have come plunging down. They are worth less than a third of their peak value in late 2000. The whole support services sector has suffered a punishing derating, particularly in recent months.

In particular there has been concern over the accounting treatment of the Government's private finance initiative, where private sector companies join together to build and run big new projects, such as hospitals. Because these are set up as off-balance sheet vehicles (whisper the phrase; since Enron it strikes fear into hearts), they are much less financially transparent.

Serco does not have the most conservative accounting policies it could have, but analysts believe its claims that changes to proposed industry standards will not have the material effect on profits seen at its rivals. Meanwhile, PFI presents a very healthy source of ongoing revenue.

What has also happened is a long overdue recognition that working with high-profile government contracts is not less risky than other activities but, if anything, more risky. With Serco company running hospitals and prisons, operating trains and maintaining tracks, its shares are, in part, at the mercy of events, and it is right this is priced in.

At 202.5p, they still trade on 21 times forecasts of this year's earnings, when a market average mid-teens rating might be more appropriate. Avoid.

Helphire shares are worth hanging on to

Helphire is officially back from the brink. The company supplies hire cars to drivers involved in accidents that aren't their fault, then demands the costs back from insurers. But it learnt the expensive way that in a David-and-Goliath battle with the insurance industry, the giants tend to win. Most of the UK's multimillion-pound insurers refused to pay up, taking Helphire to the edge of bankruptcy.

Its latest results reflected the benefits of having settled on a less confrontational business model. The insurers are now referring no-fault drivers Helphire's way, and the company posted a £1.1m profit for the 12 months to 31 March, compared with last year's £53.9m loss. By September there should be more cash coming in than going out, and there is also the possibility that the next annual figures will include a write-back of the provisions put aside against debts incurred when it was still fighting the insurers.

At 141p, the shares are up 86 per cent since this column recommended them as a recovery play a year ago. Now it is time to ask if the rebuilt Helphire can sustain its rating.

The business is now heavily reliant on big contracts from insurers and competition is fierce. Analysts are not yet clear what the margins on Helphire's business can be or the level of growth to expect, but only a small percentage of no-fault accidents are dealt with using credit hire and credit repair, so there is plenty of scope for growth. Insurers are increasingly interested in outsourcing these functions, and improved turnover can flow quickly to Helphire's profits. The group is also making progress in expanding the services it offers. In one, it promises to replace lost or stolen jewellery at wholesale prices on behalf of general insurers.

The risks are higher than they were, and those with profits should lock them in, but it is worth hanging on.

Majestic's results are nothing to whine about

The king of wine retailing, Majestic Wine, has every reason to crack open a bottle to celebrate. Yesterday the wine warehouse group notched up its ninth consecutive year of profit growth. Wine sales are flowing strongly and British drinkers are reaching for the corkscrew more often than ever before.

While the market in the UK is growing 8 per cent a year, Majestic's 12 per cent rise in underlying sales in the year to 1 April shows that its out-of-town wine palaces are poaching customers from the traditional high street operators. Customers prefer the range of wine sold by Majestic and the service provided by its staff, who not only offer a "bluffer's guide" to wine buying but will either lug the cases out to customers' cars or arrange for free delivery.

To supplement the 10 per cent increase in first-time customers, Majestic is chasing corporate business, from restaurants and bars. Sales to companies made up one quarter of the group's £104.6m turnover, which rose 20.6 per cent on the year before. Pre-tax profits before goodwill rose 34 per cent to £6m.

Last October Majestic expanded its kingdom into France by buying the Wine and Beer Company, giving it its first four continental stores. Tim How, the chief executive, intends to use this acquisition to stock the car boots of UK customers on both sides of the Channel, rather than to take on the French on their own turf.

Analysts see plenty of earnings growth from Majestic's plans to open about six new sites a year. This should keep the company busy for the next eight years, bringing its kingdom of warehouses up to at least 150.

The shares are tightly held, with the chairman and his family owning more than 60 per cent. But even after yesterday's celebrations, which sent them 5 per cent higher to 460p, they still look good value.

Trifast remains a hold in trying telecoms markets

As the telecoms and technology titans come crashing, even the little guys get hurt. Trifast is one such little guy. It makes fasteners and miniature screws for use in telecoms infrastructure and electronics. Its biggest customer is Compaq, whose own weakness in recent years has forced it into the arms of Hewlett-Packard.

Results for the year to 31 March showed turnover fell 14 per cent and profits (before goodwill, restructuring and tax) slid from £11.85m last time to just £1.97m. After lay-offs and factory closures, the company was deep in the red.

Its proudest boast, after such a fall, was that it has not lost a single customer. OK, some have been ordering as little as 10 per cent of the stock they demanded in the late Nineties, but Trifast has proved itself and its products in the most trying of conditions.

Trifast has reduced costs by £3m a year, and is seeking out a much broader range of customers. It has halved, but not axed, its dividend and remains cash generative. Indeed, it is now enjoying organic turnover growth of 3 per cent.

The stock, up 3p to 67.5p, is on 18 times this year's earnings, recognising the scope for upward revisions to forecasts. It's a fair rating for a company that is holding it together well.

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