Serco still thriving

Serco’s (SRP) half-year figures are at the top end of analyst expectations, as governments around the world continue to rely on outsourcers for help with prisons, immigration and defence. 

Revenue increased by 13 per cent to £2.5bn in the period, while underlying operating profit grew by 14 per cent to £148mn. Adjusted net debt was the main surprise, however, at £216mn – significantly below earlier guidance of £250mn. This figure is expected to fall to £170mn by the end of the year, while free cash flow is expected to reach £150mn, compared with a previous target of £130mn. 

It’s worth noting, however, that reported debt is far higher, as it includes lease liabilities of £438mn, the majority of which relate to housing for asylum seekers.

The big problem for Serco – indeed, for all outsourcers – is the lumpy nature of contract work. Companies are constantly at risk of losing business to rivals. So far, however, Serco is doing a good job of hanging on to its projects. After the period end, for example, it secured an extension to its lucrative Australian immigration contract until December 2024. 

Management also noted that win rates on new work and rebids and extensions moved back up to “around the levels we have delivered on average over recent years” after a dip in 2022. It currently wins 90 per cent of its existing work back, and secures 30 per cent of the new contracts it bids for. 

There was a slowdown in new work in the first half of 2023, however. Serco’s book-to-bill ratio, which compares orders received with invoiced work, slipped to 83 per cent. Management blamed this on the period “being relatively quiet in terms of contract award decisions, with a significant number of bids currently submitted and awaiting decision”. Its order book has also dipped by 3 per cent to £14.1bn.

However, Serco still looks very well placed to benefit from governments’ reliance on outsourcers, and its ability to retain contracts suggests the quality of its service is high. Meanwhile, after a tough 12 months, the group is trading on a forward price/earnings ratio of just 10.6, compared with a five-year average of 15.8. Buy.

Last IC View: Buy, 156p, 28 Feb 2022