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Serco reinstates payout and not everyone is happy

The outsourcer continues to work its way back from the brink
Serco reinstates payout and not everyone is happy
  • Chief executive Rupert Soames has defended the dividend reinstatement
  • Strengthening cashflows underpin the return to shareholders

Why have many outsourcing groups struggled? Well, those whose contracts are primarily with central government and/or municipalities are usually charged with providing services that are often under public and regulatory scrutiny, but are expected to be delivered at knock-down prices.

The clamour to win contracts as ever more public services were put out to tender left many providers with insufficiently-priced legacy contracts and an unwieldy set of operations.

That was certainly the case when Rupert Soames took the reins at Serco (SRP) in 2014, evidenced by a slew of profit warnings. But the group has just reinstated its full-year dividend after delivering a 37 per cent increase in underlying EPS, together with a 118 per cent increase in free cashflow to £135m.

However, the reinstatement has not been welcomed by everyone, as the group is one of several companies operating Covid-19 testing sites, while providing call handlers for the government’s test-and-trace system. Some believe that the reinstatement is ill-timed given we are still amid a pandemic, and the system itself has attracted criticism due to early delays. But some simply believe that NHS services should be sacrosanct.

Clinical services for Covid-19 have been a lower-margin affair, but the contracts have generated nearly £350m of revenue, partly mitigating pandemic-linked losses in transport, health and leisure. And Mr Soames makes the point that Serco has repaid all the funds it received from government support schemes, and the owners are entitled to some recompense after the amount of capital they have pumped into the group over the past few years.

Management has increased its guidance for 2021 underlying trading profit by 6 per cent, to £175m, which equates to year-on-year growth at constant currencies of 10 per cent. Buy.

Last IC view: Buy, 139p, 16 Oct 2020

SERCO (SRP)    
ORD PRICE:136pMARKET VALUE:£ 1.65bn
TOUCH:135-136p12-MONTH HIGH:172pLOW: 97p
DIVIDEND YIELD:1.0%PE RATIO:12
NET ASSET VALUE:58p*NET DEBT:64%
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20163.0129.61.60nil
20172.9510.6-0.80nil
20182.8474.16.20nil
20193.2580.74.31nil
20203.8815310.91.4
% change+19+90+153-
Ex-div:13 May   
Payment:04 Jun   
*Includes intangible assets of £750m, or 61p a share