Serco orders at highest level in a decade

The market responded positively to news that Serco’s (SRP) earnings for 2023 were slightly ahead of expectations. The provider of outsourced public services revealed that operating profits, ex-amortisation of intangibles and exceptional items, had increased by 5 per cent to £249mn, 60 per cent of which was generated outside of the UK.

Part of the reason that revenues remain on an upward trajectory is that the fall-away in Covid-related work has been more than offset by increased volumes in the immigration and defence segments, both of which have benefited from significant investments in recent years.

Mark Irwin, Serco’s chief executive, said the group “improved [its] win rates compared to the prior year” with prospects boosted by a “substantial pipeline of opportunities”. Indeed, order intake reached £4.6bn to leave the order book at £13.6bn at the end of 2023, with the order pipeline of potential new work up by 28 per cent since the half-year mark – the “highest level in a decade”.

Leaving aside the order outlook, perhaps the most pleasing aspect from an investment perspective is the material improvement in the cash management process, specifically an “increased focus on the timeliness and accuracy of issuing sales invoices”. This translated into a 31 per cent increase in free cash flow to £209mn on the back of a cash conversion rate of 111 per cent.

Liberum gives a full-year earnings per share (EPS) multiple of 15.9 times, rising to 17.8 times in 2025.

Revenue through the year will be constrained, partly as a result of timing issues following the successful rebid on its Centers for Medicare & Medicaid Services contract in the US. However, underlying operating profit is expected to grow by around 5 per cent to £260mn. So, despite a 21 per cent gain in the past 12 months, the shares still represent relatively good value at 12 times earnings. Buy.

Last IC view: Buy, 158p, 3 Aug 2023