Investment Column: Serco reassurance argues against selling


Serco

Our view: hold

Share price: 547.5p (+0.5p)

That Serco's shares managed to remain strong throughout the session after the outsourcer issued an update yesterday is creditable. Worried by Europe's sovereign debt crisis, the markets were volatile throughout the day, making the strength in Serco's stock more meaningful.

And indeed, the update was reassuring, with the group saying that it remained on track to deliver on expectations for 2011. The order book stood at £16.6bn at the end of December, and the new year has already seen some notable contract wins.

The problem is that, as far as the UK is concerned, market sentiment is likely to remain clouded as the Government's austerity drive takes root. Remember, we have only seen the tip of the iceberg, and much more is due in the way of cuts and tax hikes.

You could go with the view that this is good for the outsourcers as the Government farms out services to the private sector. Though valid, that only holds water to a point, as there are still likely to be headwinds, in our view. Serco's attempt last year to demand rebates from suppliers, for example, was scotched by the Government, which said it wanted supply chains to be exempt from pricing pressures.

On the upside, the rebate episode led to a reassessment of the pro-outsourcing narrative in the markets. Serco's shares fell back in the weeks afterwards, and though they mounted a strong rally in February, they have fallen back again. Currently, they remain below the levels seen when the rebate issue first spilt out into the public domain.

Of course, they could slide further – particularly if, as Panmure Gordon warns, the group seeks to make acquisitions that increase execution risk in the near term. But while we agree about the potential for pitfalls, we do think that Serco is fairly valued at current levels. The fact is that the market has become more realistic about the upside, and the downside, for outsourcers. That, coupled with the reassuring update, argues against a sell. But the risks mean that we aren't quite ready to buy at this point.



Lonmin

Our view: buy

Share price: 1,562p (+13p)

When we last looked at Lonmin, we held back from buying despite the face that the share price was relatively weak at the time, and despite the prospect of gains in platinum price.

Our caution was down in part to the fact that the miner came across as a high cost producer.

Yesterday, it confirmed its guidance for costs in 2011, which it expects to be broadly in line with wage inflation. This is encouraging, although one analyst did point out Lonmin still has a lot do in terms of meeting that target.

That said, we think the company deserves the benefit of the doubt. After all, the City was worrying that it might cut its full year sales target. But no such reduction was forthcoming.

Besides, the stock is down around 20 per cent since the beginning of the year. Although many are fretting about a correction in commodity prices and its impact on mining equities, Lonmin has already been through quite a correction. If the wider sector does in fact move south, it should stand firm, in our view.





Hiscox

Our view: hold

Share price: 414.3p (-1.9)

Hiscox, the Lloyd's of London insurer which issued an update for the first three months of the year last night, has confirmed that its hit from the Japan tsunami could be up to $150m, while its loss estimates for the Queensland and New Zealand earthquakes remain at £15m and £60m.

Gross written premiums year-on-year fell by 8 per cent to £453.5m, in line with expectations, as the insurer remained disciplined when it came to underwriting and walked away from poorly-rated risks.

More importantly its reinsurance rates are now back to 2010 levels, with increases in some areas, especially in the Asia-Pacific region. That means it is well-positioned to take advantage of the coming US hurricane season. In fact, there could be average rate rises of around 10 per cent during the June-July renewal period, according to the company.

There were also positive figures from the UK's retail business with premium income climbing 8 per cent to £86.2m. However, with Japan losses still subject to a large degree of uncertainty at the present time, we would be wary of wading in right now.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
election 2015The 10 best quotes of the campaign
News
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
News
people
Voices
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'