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Serco soars as guidance restored

The outsourcer is pointing to revenue and profit growth for the six months to 30 June, and has reinstated and upgraded its full year outlook
June 17, 2020

Serco’s (SRP) shares leapt by as much as 17 per cent after the outsourcer revealed it expects a strong performance in the six months to 30 June. Revenue is guided to rise by almost a quarter year-on-year to £1.8bn, reflecting the contribution of the Naval Systems Business Unit acquired from Alion last August, as well as 14 per cent organic growth. Meanwhile, underlying trading profit for the first half is set to come in at £75m-80m, up from £51m a year earlier.

IC TIP: Buy at 156p

While the group has experienced “significant operational challenges” thanks to Covid-19, it says this has had “little overall impact” on its profits in the first half. That’s not to say it has been unscathed, rather that losses in areas such as leisure and transport have been offset by additional work assisting in the pandemic response. For example, Serco is operating 20 drive-through test centres as part of the NHS’ ‘Test and Trace’ programme. Such work is lower margin, however, and according to Liberum, the group has seen £100m of Covid-19-related revenue so far.

Net debt (excluding lease liabilities) is projected to be around £200m at the end of June, benefitting from £50m of tax deferrals. Equivalent to 1 times cash profits (Ebitda), this is well below its lending covenant of 3.5 times. With at least £300m of headroom on its borrowing facilities, Serco should have sufficient liquidity to weather the Covid-19 storm.

Pandemic uncertainty had led the group to withdraw its full year guidance in early April. But it has now been reinstated and the outlook upgraded. Chief executive Rupert Soames cautioned that “there is a more than normal degree of risk in our guidance, but we feel it better that we give some indication rather than none”. The group is pointing to 9 per cent organic revenue growth, up from its previously forecasted 4 per cent. Expectations for full year underlying trading profit have also been revised from £145m to between £135m-150m.