In today’s article I’ll ask whether three of this year’s big fallers could start to bounce back in 2016.
Serco
Shares in outsourcing specialist Serco Group (LSE: SRP) fell by nearly 10% this morning, despite the group upgrading its profit guidance for 2015.
The group said that underlying trading profit will be around £95m in 2015, but is likely to fall to around £50m in 2016. This is mainly due to the loss of revenue and profit from the firm’s Business Process Outsourcing (BPO) unit, which is being sold.
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However, the BPO sale should bring in £250m. It should also help to reduce net debt from nearly £300m to a more manageable £100m. Serco’s balance sheet is getting stronger and cash flow should also improve next year, although a net outflow is still expected.
The challenge for the firm now is to build up a pipeline of profitable new work to replace the unprofitable contracts which Serco is terminating early. Until we see evidence of this, I don’t think there’s any rush to buy Serco shares.
Avanti Communications
Satellite broadband provider Avanti Communications (LSE: AVN) edged higher this morning on news of a deal with BT Group to provide satellite broadband to UK customers in rural areas.
According to Avanti, up to 300,000 homes with ADSL speeds of under 2Mbps will qualify for this scheme. Installation costs will be subsidised by a government grant, but customers will have to pay the normal monthly service charge.
Although positive, I’m not sure this will be enough to turnaround Avanti’s fortunes. The group’s recent first-quarter trading update was dismal. Revenue was unchanged from the same quarter one year ago and earnings before interest, tax, depreciation and amortisation (EBITDA) were -$2.9m.
Worryingly, average utilisation of the firm’s satellite fleet was less than 25%. The firm continue to promise that its fleet will generate a lot of cash flow as utilisation rises, but seems to be struggling to deliver this. The latest broker forecasts suggest Avanti will report post-tax losses totalling $104m over the next two years.
Interest payments totalled $52m last year and the firm has added $115m of new debt to its previous total of $528m so far this year. With cash standing at $219m, much of which is already committed, I think further fundraising is likely to be necessary before Avanti turns a profit.
In my view, Avanti remains a sell.
Glencore
A story in the FT today suggests that mining and trading firm Glencore (LSE: GLEN) may complete its debt reduction programme ahead of schedule.
The company is due to update the market on Thursday, but I’m beginning to think Glencore shares are now quite reasonably priced. The firm is expected to report a net profit of $1,320m for 2015, rising to $1,777m in 2016.
That leaves Glencore shares trading on a 2015 forecast P/E of 14, falling to 12 in 2016. A dividend yield of 4.3% is expected for 2016. Glencore’s valuation may now reflect much of the risk facing the firm.
Glencore is starting to look like a potential recovery buy to me. However, commodity prices remain weak. Until prices start to firm up, I suspect Glencore’s earnings and share price will remain subdued.
