Serco Group Plc

Serco Group Plc (LON: SRP) is listed on the FTSE 250 index. The Company provides public services across defence, justice & immigration, transport, health and citizen services.

On 5 August 2021, SRP would announce its H1 FY2021 results.

The last dividend of GBX 1.40 per share was paid on 4-June-2021 (final dividend).

Investment Rationale for Valuation – Speculative Buy at GBX 135.70

• SRP on 14 June 2021, won a UK defence contract with a potential value of £3.4 billion over the initial seven years. It also has an expected base value of £900 million.
• SRP has recently acquired Facilities First Australia (FFA), a leading Australian facilities management company and Whitney, Bradley & Brown Inc. (WBB), a leading technology and engineering services provider to the US military.
• SRP recently introduced an innovative electronic system to manage prisoners' property.
• SRP has extended its contract with the Royal Air Force with its specialist Surface Finish aircraft painting expertise and won two contracts from the UK Department for Work and Pensions (DWP) with an estimated value of £350 million.
• On the profitability front, SRP has a higher net margin than the industry median of 2.1% since FY2019.
• On the technical front, the 200-day EMA at around GBX 133.07 is lower than the stock price, indicating a potential uptick in the stock price in the near term.

Key Risks

• The recent acquisitions may not bring the desired synergies, affecting the margins of the Company.
• Change in consumer attitudes to aviation or the use of private vehicles could affect SRP’s transport contracts.
• Any extension of lockdown due to the Indian Covid variant could put service delivery across sectors under pressure.
• SRP has international operations. Hence, fluctuations in exchange rates could impact the financials.

Recent News

Share Purchase: On 14 June 2021, SRP announced the purchase of 385,602 ordinary shares of GBX 2.00 each.

New Non-Executive Director: On 27 May 2021, SRP announced the appointment of Kru Desai as a Non-Executive Director effective 21 October 2021.

Financial Highlights (for the year ended 31 December 2020 (FY2020), as of 25 February 2021)

(Source: LSE Website)

• Overall revenue in FY2020 was up ~20% YoY, driven by strong demand for immigration services, SRP’s Covid-19 services and positive impacts from the August 2019 acquisition of NSBU.
• The increased revenue and an exceptional gain on disposal resulted in diluted reported EPS dramatically surging by ~153% YoY.
• As a result, the free cash flow rose by ~118% YoY, and it helped in reducing the adjusted net debt by ~73% YoY.
• The impressive result encourages the Board to restart paying dividends to shareholders with an amount of GBX 1.40 per share.

One Year Share Price Chart

(Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company delivered a solid result in FY2020 despite the Covid headwind. It has made acquisitions and won contracts, which are expected to deliver favourable results. As per experts, the UK economy is expected to grow by ~5.3% in Q2 FY2021. The management already increased its profit guidance for FY2021 by 6%, showing further confidence in SRP’s prospects. The stock made a 52-week low and high of GBX 105.90 and GBX 171.65, respectively. On the technical chart, the next important support level is GBX 120.00.

Based on the Company’s favourable prospects driven by recent contract wins and acquisitions, better profitability of the Company than the industry, the improved pipeline of new orders, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Serco Group Plc at the current market price of GBX 135.70 (as on 14 June 2021 at 7.00 AM GMT), with a lower double-digit upside potential based on 16.65x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Naked Wines Plc

Naked Wines Plc (LON: WINE) is listed on the FTSE AIM All-Share index. It is a UK based holding company, which is engaged in the retailing of wines and is a leading wine specialist.

Investment Rationale for Valuation – Speculative Buy at GBX 697.00

• The Covid-19 induced accelerated channel shift to online wine purchasing has been a headwind for the Company, with top-line surging by ~68% YoY in FY2021.
• WINE would continue to focus on the lucrative US market, building on the strong sales momentum to drive future growth.
• An investment of £50.0 million in new customers is expected to deliver a five-year payback of threefold sales growth.
• On the liquidity front, WINE has a higher current ratio than the industry median of 0.81x since FY2019.
• On the leverage front, WINE has a lower debt/equity ratio than the industry median of 0.92x since FY2019, indicating its ability to raise debt at a cheaper rate.
• During the last six months, the stock delivered a higher return than its benchmark index of the FTSE AIM All-Share index.
• On the technical front, the 200-day EMA at around GBX 667.00 is lower than the stock price. Hence, the stock price could have an upward movement in the near term.

Key Risks

• Customer acquisition costs could move up, putting further pressure on margins.
• It is uncertain that the online wine purchasing trend would continue in the post-Covid period. Hence, the sales may be affected.
• As the Company operates in multiple geographies, its margins could be affected due to foreign exchange rate fluctuations.

Financial Highlights (for the year ended 29 March 2021 (FY2021), as of 11 June 2021)

(Source: LSE Website)

• Driven primarily by an accelerated shift to online wine purchasing due to COVID-19, total sales were up ~68% YoY in FY2021.
• US is the largest market with 48% of total sales. In the US segment, sales were up 78% YoY.
• However, there was a jump in advertising costs by 114%, which led to a bigger loss, with the basic loss per share surging by 48% YoY.
• On a positive note, WINE’s cash-accretive operations led to cash position rising ~56% YoY in FY2021 despite a bigger loss..

One Year Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

WINE has dramatically increased its top-line by ~68% in FY2021. However, its efforts to win customers led to a very high surge in advertising cost, which put pressure on its margins. The Company would continue to focus on the lucrative US market to drive future growth. It would also make further significant investments in new customers, which is expected to deliver multi-year sales growth. The Company has sufficient liquidity at its disposal to execute its plans. Hence, it is well-positioned to achieve its strategic goals. The stock made a 52-week low and high of GBX 340.00 and GBX 914.00, respectively. On the technical chart, the next important support level is GBX 580.00. 

Based on its strategic initiatives, better liquidity and leverage profile than the industry, further investment in new customer wins, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Naked Wines Plc at the current market price of GBX 697.00 (as on 14 June 2021 at 9.40 AM GMT), with a lower double-digit upside potential based on 5.89x Price/NTM Book (approx.) on FY22E book value per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

*Dividend Yield may vary as per the stock price movement

Disclaimer

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