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Serco marches forwards

The UK outsourcer has continued its momentum into the first half of 2019, but beware of rising debt
June 27, 2019

Serco’s (SRP) chief executive Rupert Soames hails 2018 as an “inflection point” for the group, following several years of decline. Continued growth in the first half of 2019 would appear to support this view.

IC TIP: Hold at 147p

In a pre-close trading update, the outsourcer said it expects revenues of around £1.5bn for the six months to June – implying an increase of a tenth year on year, or 6 per cent at constant currencies. Organic growth of 4 per cent was fuelled both by defence operations in the Americas, and citizen services in the Asia Pacific region. Now, Serco reckons full-year sales will land at the top end of its previously guided range of £2.9bn to £3bn – against £2.8bn in 2018.

Half-year underlying operating profits have also improved – rising by more than a fifth at constant currencies, or by a third on a reported basis to approximately £50m. For the full-year, Serco has maintained its guidance of profit of £105m.

Meanwhile, the group’s first-half order intake should exceed £3bn – rendering 2019 the third successive year that this metric has surpassed revenues. Along with other wins, rebids and extensions, Serco has signed contracts worth £1.9bn for asylum accommodation and support services in the UK, and won £0.6bn of work for defence healthcare provision in Australia.

The previously announced acquisition of the Naval Systems Business Unit from Alion in May boosts the scale and capability of Serco’s US defence business and is expected to be earnings accretive in 2020. Funded by a £140m placing, the deal is expected to complete in the second half. Excluding the placing’s proceeds, adjusted net debt to 30 June should come in between £210m and £230m. Including the proceeds, Serco expects this to rise to £250m for the full year – consistent with its guidance at the time of the acquisition announcement, when this figure was lifted from £200m.

Broker Peel Hunt anticipates adjusted pre-tax profit of £84.9m and EPS of 5.3p in 2019, rising to £123m and 7.8p in 2020.