- Profit forecast for 2020 upgraded
- Covid-19 contract performance under heavy scrutiny
Under-fire services company Serco (SRP) says Covid-19 work has boosted revenue and profits beyond expectations partly thanks to the UK government extending its test site and test-and-trace contracts. It has come under attack from some MPs because of the performance of those two services.
The outsourcer has raised its full-year outlook for 2020, anticipating revenues of roughly £3.9bn. That's 5 per cent higher than previous guidance, and 15 per cent higher year-on-year. It also estimates that underlying trading profits will land at £160m-165m - 10 per cent higher than earlier guidance at the upper-end of the range (on an organic basis), and a 30 per cent improvement year-on-year.
On top of the UK contracts, Serco’s work in US healthcare and Australia’s immigration system boosted the year’s earnings guidance, also due to Covid-19.
As part of its trading update, the company put out a description of its work on track and trace, saying that it believed its “operational delivery [had] been outstanding”. Serco manages 25 per cent of the 500 UK testing sites and is one of two contractors that is responsible for contacting people identified to the company by NHS professionals as having been in close contact with someone who has tested positive for Covid-19. It noted that it is "not involved in other parts of the process" such as designing the overall programme, the NHS app or booking and providing tests.
In parliament this week, Labour MP Rachel Reeves said “sack Serco and give those resources to local councils”, noting that government's “Serco model” of test and trace had only managed to reach 69 per cent of people identified in England, while in Wales 83 per cent had been reached. Fellow Labour MP Dan Cardon said Serco was being “rewarded for its failure” with the contract extensions.
Outside of Westminster, Serco hit a different nerve with its profit upgrade. The group's shares climbed by as much as 18 per cent in response to its latest unscheduled trading statement, reaching 140p - though they are still down by 15 per cent year-to-date. The other positive news within the update was that adjusted net debt is expected to come down to £100m-£150m at the end of the year, from £200m previously expected.
The company said that a decision on bringing back the dividend would be made in December.
Serco has plenty of other businesses outside of the contentious UK, US and Australian work, but any perceived failure in high profile areas like healthcare put it under the spotlight. Tales of people travelling hours to get tested for Covid-19 are likely to stay with the public far more than Serco cutting its debt figure. Even so, looking at the balance sheet alone, we see value. Speculative buy.
Last IC View: Buy, 169p, 6 Aug 2020
