Serco surges, but Domino’s Pizza is out of favour

Among the big winners today is this former laggard after an amazing rebound since March.

Serco (LSE:SRP) laid down an important marker for the wider market recovery today by reinstating the financial guidance it withdrew at the height of Covid-19 uncertainty in April.

Today's unscheduled update triggered a 18% jump for the outsourcing company's shares, with investors further cheered by stronger-than-expected revenues in the lockdown period.

Serco's performance was the highlight of a second positive session in a row for the FTSE 250 index, which was assisted by a 5% rise for Kingfisher (LSE:KGF) after a big jump in second quarter sales at B&Q outlets. Domino's Pizza (LSE:DOM) was the biggest faller, diving 9% after revealing the operational cost of keeping Britons fed during the lockdown.

The fast-food delivery chain is still unable to provide investors with financial guidance, which it blamed on uncertainty about how long the Covid-19 measures will have to last.

Forward guidance went the same way as dividends during the March and April market fall-out, with only AstraZeneca (LSE:AZN) and a handful of other companies in the FTSE 350 index having the confidence to provide investors with a steer on their full-year performance.

Source: TradingView. Past performance is not a guide to future performance.

Serco's decision to reinstate its guidance is a welcome development, even though CEO Rupert Soames admits there is a more than normal degree of risk in the figures: “We feel it better that we give some indication rather than none," he said.

There are some big differences to the previous guidance withdrawn on 2 April, with organic sales growth now expected to be 9% rather than 4% and leading to revenues of around £3.7 billion compared with up to £3.5 billion previously. Underlying profits should be between £135 million and £150 million, rather than £145 million estimated earlier.

During the pandemic, tens of thousands of Serco staff were on the front line in hospitals, prisons, trains, refuse lorries, asylum seeker accommodation, contact centres and sites of national strategic importance. 

Soames said the operational challenges caused by Covid-19 were significant but that losses in some parts of the group — notably leisure centres and rail services in the UK — were largely offset by additional work to help customers elsewhere.

Underlying trading profits for the first half of the year should be between £75 million and £80 million, which is 50% higher than a year earlier. Much of this growth came from businesses outside the UK and from contracts won in 2019, as well as the acquisition of the Naval Systems Business Unit of Alion for US$225 million in August. 

Soames gave no indication about a dividend alongside interim results on 6 August. In February, he celebrated the turnaround of the former blue-chip stock by declaring a shareholder payment for the first time in six years. Shares were today at 156.3p, which means Serco has recovered all the losses seen during the February and March sell-off.

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Bank note printer De La Rue (LSE:DLAR) is hoping to follow in Serco's footsteps by completing its turnaround plan in time for the 2022/23 financial year, when it plans to be generating free cash flow and supporting dividends for shareholders.

It took an important step in that direction today by tapping the City for net proceeds of £92 million in a share placing and open offer. As well as covering the bill for its cost reduction programme, the money will be used to prime its Authentication division for a greater role in the provision of tobacco tax stamps compliant with World Health Organisation rules.

It also wants to invest in new equipment to double the currency division's capacity for polymer production. The Bank of England £20 note released in February was the 42nd banknote worldwide that De La Rue has secured on its Safeguard polymer substrate, with De La Rue also designing and printing the new £50 banknote for next year.

About 3% of the world's banknotes by volume and 12% by denomination have moved to polymer, creating a big opportunity for the company. And contrary to expectations, the currency division has been witnessing recent strong global demand as central banks seek to increase stock levels during and after the Covid-19 pandemic.

De La Rue's placing has been priced at 110p, which is not only a 28% discount to the price on Tuesday night but also a far cry from the 600p seen in 2018 prior to the company's downturn in fortunes.

The stock plunged as low as 40p in late May before rallying by more than 300% after an encouraging trading update boosted hopes that new CEO Clive Vacher can lead a turnaround of the famous stock. It was up another 2% at 156.2p today, after initially falling sharply in the wake of the fundraising move and full-year results.

The first update from the new boss at Domino's Pizza was met with an 8% fall in share price today, with Dominic Paul telling investors that underlying earnings for the first half of the year will be slightly lower than a year earlier.

He said the company had incurred considerable additional costs during the lockdown period to offset the benefits from increased sales. Even a positive change in consumer purchasing behaviour as people buy more sides and desserts has had consequences in terms of the impact on margins.

Regarded by many investors as one of the stocks best placed to weather the pandemic, Domino's shares raced from 268p at the end of March to 359p two months later. They were back to 311.4p this morning.

Source: TradingView. Past performance is not a guide to future performance.

Hill & Smith (LSE:HILS) chief executive Derek Muir has seen his fair share of economic downturns during 32 years with the FTSE 250 index company, which makes road infrastructure including safety barriers, street lighting columns and bridge parapets.

He reported today that revenues for April and May were 26% lower than the same period last year, although the group remained profitable and is now seeing a modest recovery in trading. it follows a strong first quarter of the year, when organic revenues rose 4.8%.

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Muir added that the group was well placed to benefit should governments look to stimulate economic activity through investment in "shovel ready" infrastructure schemes.

He added:

“In the medium and longer term we expect to see continued strong levels of infrastructure investment in our core markets both in the UK and the US.”

Shares rose 4% to 1,358p, which is within 100p of the level seen prior to the market sell-off. They had been as low as 902p in early April.