Derek Pain: It's been hard labour but I still believe Serco will reward me

Serco has a long road ahead before it can return to its pre-scandal days, but debts are down from nearly £700m to £77.5m

Derek Pain
Friday 04 March 2016 23:01

Last year's recruits to the No Pain, No Pain portfolio continue to haunt me. Only two shares, Patisserie and Serco are recording profits; the other four are in the red or marking time.

Shares in Serco, the support services group, were enlisted at 98p. Last week, they were at about 76p. But then indications that a comeback was under way, with no new horrors to unsettle investors, lifted the price to above 100p. The stockbroker Liberum described the results, a loss of £69.4m, as "reassuringly dull". The previous deficit was a staggering £991.5m.

Serco's fall from grace was dramatic and painful. In 2013, it was exposed for tagging offenders who were either in jail or dead, and the shares – which had been above 600p during that year – started their disastrous decline.

It still has a long road ahead before it can return to its pre-scandal days. But debts are down from nearly £700m to £77.5m and the company has, under chief executive Rupert Soames, reorganised its operations – selling some divisions and endeavouring to extinguish unprofitable contracts. The changes mean that the current year's revenue will be lower.

I descended on Serco because I sensed recovery was in the air. Maybe the portfolio arrived a little too early, but I believe an early bird does catch the worm and the shares will eventually be a profitable investment.

Another 2015 recruit, Interserve, reported a rise in profits last week, but its shares are well below my 599p buying price and their year's peak of 633p. The pre-tax profits for 2015 increased by 28 per cent to £79.5m.

The support services, construction and equipment business will, like Serco, suffer from the impact of next month's introduction of higher minimum wages. The indications are that this year's profits will be little changed, but Interserve hopes for growth in the following year.

A longer-term constituent has also been on the profit run. Lloyds Banking Group is below the portfolio's buying level despite a full-year dividend of 2.25p and a special payment of 0.5p a share, providing a not inconsiderable yield of more than 5 per cent. Profits were lower in last week's results but the payments indicate that it is aiming to recover its position as one of the City's most reliable dividend payers. It was forced to abandon dividends following the financial crisis and resumed with a 0.75p payment last year.

I nurse fond hopes that Serco and Lloyds will be in profit when I calculate my quarterly report on the portfolio's performance later this month. It could depend on the stock market's performance as shares have made a decidedly indifferent start to 2016 – and with the In-Out referendum on Europe and continuing worries about the world's economy, they have much to be concerned about.

Booker, the cash-and-carry chain that is now supplying the Budgens/Londis retail networks, remains the portfolio's star performer but Avation, Marston's, Fulham Shore and, despite its recent retreat, Whitbread are showing splendid gains. With the exception of Fulham Shore, which arrived in 2014, they are all-long term constituents.

Patisserie, the cake shop and casual dining chain, and Serco, are showing profits. As I write, Patisserie shares are trading at around 370p, compared with their enlistment price of 285.8p. They have been as high as 472p, but very few shares are riding at their peak.

For some time after I roped them in, the price was below my buying level, falling to 255p. Peel Hotels is back to my buying price of 100p.

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