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Serco soars on guidance hike

A confident first half marked another important step in Serco's recovery
August 8, 2016

Serco's (SRP) shares surged to their highest level in over a year after the outsourcing group raised its full-year guidance for a second time. Back in May, Serco said it expected to deliver trading profit of at least £65m this year. That was already a significant upgrade from its previous guidance for around £50m. Now Serco says it expects to make at least £80m this year.

IC TIP: Buy at 134.5p

That follows a better than anticipated performance in the first half. Underlying trading profit rose 9 per cent to £51m and underlying EPS more than doubled to 3.7p. Taking an axe to costs has certainly helped. Serco slashed its first-half operating costs by £275m, which represents a staggering £550m saving on an annualised basis.

But chief executive Rupert Soames was careful to point out that much of the profit beat came from factors that are unlikely to repeat, such as contracts running on for longer than predicted and better than expected final settlements on exited contracts. The weak pound was also a help, lifting the contribution from overseas earnings.

Nevertheless, a 46 per cent jump in the bid pipeline and news that trading performance and cost savings are tracking ahead of plan suggests self-help measures are working, too.

Broker Peel Hunt now expects adjusted pre-tax profit of £66.5m for the full year, giving EPS of 4.7p (from £64m and 3.4p in 2015)

SERCO (SRP)
ORD PRICE:134.5pMARKET VALUE:£1.48bn
TOUCH:134.5-134.7p12-MONTH HIGH:138pLOW: 76p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:36p*NET DEBT:30%

Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151.61-16.0-2.8nil
20161.4958.15.0nil
% change-7---

*Includes intangible assets of £634m, or 58p a share