Are Serco Group plc, HSS Hire Group plc and Anglo Pacific Group plc today’s top turnaround buys?

Roland Head examines the latest updates from Serco Group plc (LON:SRP), HSS Hire Group plc (LON:HSS) and Anglo Pacific Group plc (LON:APF).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in outsourcing firm Serco Group (LSE: SRP) surged 10% higher this morning, after the firm increased its trading profit forecast for the year by 30%.

The company’s previous forecast was for an underlying trading profit of £50m in 2016. That figure is now expected to rise to “not less than £65m”. This progress is the result of a number of one-off contractual gains, plus certain cost savings running ahead of schedule.

In my view today’s news confirms the growing momentum of Serco’s turnaround. However, the firm’s revenues have fallen by 38% since peaking at £4.6bn in 2011. It’s also not clear whether profit margins will ever return to historic levels.

Serco shares currently trade on a 2017 forecast P/E of 47 and offer no yield. It’s clear to me that chief executive Rupert Soames needs to deliver both sales growth and higher profit margins to justify further share price gains.

It’s a big challenge, but today’s figures suggest to me that Mr Soames may succeed. In my view Serco remains a long-term buy.

Will more cash be needed?

Shares in equipment hire firm HSS Hire Group (LSE: HSS) fell by more than 5% this morning, despite the firm’s assurances that first-quarter trading was in line with expectations.

I suspect that investors selling the shares this morning are concerned about the group’s debt situation. The firm announced the appointment of a new chief financial officer today, alongside news that its net debt rose from £218m to £234m over the last three months.

Based on the firm’s 2015 results, this means that HSS’s net debt is worth more than the £183m value of its property, plant and equipment. The firm’s net debt of £234m is also nearly 20 times this year’s forecast profit of £12m.

These figures suggest to me that HSS could find it difficult to repay or refinance its borrowings. A rights issue or placing to make the firm’s debt more sustainable is a definite risk, in my opinion.

For this reason I don’t think HSS is an attractive buy at the moment. The shares could have further to fall.

Could this one double?

Mining royalty firm Anglo Pacific Group (LSE: APF) buys stakes in other company’s mines in exchange for a slice of future revenues. The firm’s business has been hit hard by the mining downturn, but I believe Anglo Pacific’s fortunes could soon start to improve.

The company said today that first-quarter trading was in line with expectations and that royalty income was expected to rise sharply during the second half of this year, as it did last year.

Prices for two of Anglo’s main commodities, coking coal and vanadium pentoxide, are starting to recover. The firm also believes its royalty deal with uranium miner Berkeley Energia could be worth $10m more than its recorded value, based on a recent deal between Berkeley and another party.

The big question is whether Anglo’s earnings will recover fast enough to allow the firm to maintain its planned 6p per share dividend. This currently provides a forecast yield of 8.2%. A yield this high is always risky, but even if the payout is cut I think Anglo Pacific could do well from here.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of Anglo Pacific. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »