Serco's numbers stick to schedule

Britannic re-think proves a sound policy; Symbian disposal will pay dividends at Psion
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The Independent Online

Serco, the outsourcing company responsible for making trains and trams run on time in cities from London to Liverpool, duly announced annual results bang on schedule yesterday.

The company operates an array of transport services on behalf of the public sector, including London's Docklands Light Railway and Manchester's tram system, as well as military installations, government testing laboratories, local education authorities and office and business park management for the private sector.

Since its flotation in 1988, the company has consistently delivered annual increases in turnover and profits. Last year was no exception. Yesterday's results showed turnover at the group was 17.3 per cent higher at £1.55bn and pre-tax profits of £67m were up 17.4 per cent.

An impressive performance that kept analysts happy. Several published notes pointing out the company's virtues of reliability and transparency. But can the good times continue at these rates of growth? First, the fact that Serco bids for contracts to operate facilities means its forward earnings potential can be accurately tracked. The company is sitting on an order book worth a record £10.3bn, roughly equal to seven years' turnover at 2003 levels. These are contracts that have been signed, with funding agreed by customers, and which will hit the top line in coming years.

Not only that, but the company is actively bidding for an additional £5bn of business, and is currently waiting for an answer on these contracts. Meanwhile it is considering bidding on a further £14bn of business. When it comes to new business, it aims to win one in every two contracts. It is currently enjoying a 62 per cent success rate. When it comes to renewing contracts, it aims to win 90 per cent. It has a 92 per cent success rate. It is also investing heavily in training to ensure a constant supply of people well-versed in its management techniques.

Analysts are comfortable with a forward price earnings ratio for next year of 17 times and frankly so are we. Buy.

Britannic re-think proves a sound policy

After a year that saw the Britannic Group scrap its dividend, close its life insurance business and sell its mortgage division, the company's future has looked questionable.

The drastic tactics paid off and the company posted a 6 per cent rise in annual profits and resumed dividend payments yesterday. And quite a handsome dividend, too. Income investors that had to sell out last year when the dividend was scrapped, revisited the stock yesterday, sending it soaring 10 per cent. Yet it still looks as if it will yield 5 per cent in 2004, with good prospects for future growth in the pay-out, perhaps as much as 9 per cent a year. Britannic's life business may be closed, but it is now a steady form of income that more than supports the dividend.

The company reckons that with efficient, low cost systems it can make money out of running off its closed book and it wants to buy up others. Around £150bn is in closed funds already and this is set to grow. But life insurance regulation is currently in flux and changes could make such consolidation deals problematic.

At 340p, Britannic has come a long way since this time last year. Its solvency is no longer in doubt, having sold out of shares last year, and there is a lot of value tied up in the business. Shareholder funds stand at 517p a share and they have been promised a further slice of capital returned to them if Britannic fails to secure an acquisition. It has an untried business model and few growth prospects going forward, but for income investors, the shares offer a reasonable deal.

Symbian disposal will pay dividends at Psion

It is barely a couple of months since we last wrote on Psion (we advised avoiding the stock when it was 84p compared with 61.75p yesterday) but look what's happened in the meantime. Its 31 per cent stake in Symbian, a mobile phone technology that was perceived as the bulk of the value in the company, is being sold for a knockdown price.

Assuming shareholders vote that deal through next week, Psion will be left with just its Teklogix business. This sells technology systems to the likes of Volkswagen, Honda and Dell, whose workers use the gadgets to input data when, for example, wandering around warehouses calculating stock.

With businesses freeing up new money for technology investment, there is organic growth available. And, with an estimated 4 per cent market share, Teklogix will also be in an enviable position to bulk up the business through acquisitions.

Psion currently has about £17m on the balance sheet and will get in another £93.5m from Symbian. It will restart dividends this year and consider returning cash to shareholders.

In the short term, the shares could be held back by the widely held view that the company is getting shot of its major growth driver. But for those prepared to take a longer view, with the company valued at about £260m or £150m minus the projected cash equal to just over 1 times 2004's sales, the shares look interesting. Buy.