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Serco restores dividend

The outsourcer saw revenue grow for the first time in six years
February 26, 2020

While chief executive Rupert Soames described 2018 as an “inflection point”, he has characterised 2019 as the year Serco (SRP) reached “escape velocity... able to leave behind the gravitational drag of previous missteps”. Nothing like a bit of plain speaking. The outsourcer saw revenue growth for the first time since 2013, with sales rising by 13 per cent at constant currencies to £3.25bn. Organic revenue growth accelerated from 4 per cent in the first six months of the year to 12 per cent in the second half, propelled by the start of the UK asylum accommodation and support services contract. With an estimated value of £1.9bn over the next 10 years, this is the group’s largest ever contract.   

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Excluding a £23m fine from the electronic tagging scandal, underlying trading profit jumped by a quarter at constant currencies to £120m. Growth was driven by operations in the Americas, which benefited from an £8.6m contribution from the Naval Systems Business Unit (NSBU) acquisition. This purchase has enabled Serco to become a ‘top tier’ supplier of services to the US Navy whose planned fleet expansion is said to be one of the fastest-growing areas of public procurement.

The value of the order book has increased by £2.1bn to £14bn, propelled by a record order intake of £5.4bn. With £2.6bn of the order book relating to 2020, the group already has 75 per cent visibility on the £3.4bn-£3.5bn of revenue it is guiding to this year. It anticipates 4 per organic revenue growth while underlying trading profit is expected to grow by a fifth to £145m.

With free cash flow surging from £16m to £62m in 2019, the group is set to hand shareholders their first dividend since the payout was suspended in 2015. Excluding £370m in lease liabilities, net debt was up almost a quarter to £215m, although this was lower than the £250m expected by analysts. Even with the reinstatement of the dividend, Serco expects net debt (minus lease obligations) to fall to around £200m this year.

Liberum anticipates adjusted pre-tax profit of £121m and EPS of 7.2p in 2020, rising to £142m and 8.5p in 2021.

SERCO (SRP)    
ORD PRICE:155pMARKET VALUE:£1.9bn 
TOUCH:155-156p12-MONTH HIGH:169pLOW: 120p
DIVIDEND YIELD:0.6%PE RATIO:35 
NET ASSET VALUE:44p*NET DEBT:108%** 
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20153.18-69.4-15.5nil
20163.0129.61.6nil
20172.9510.6-0.8nil
20182.8474.16.2nil
20193.2580.74.31.0
% change+14+9-30-
Ex-div:13 May   
Payment:5 Jun   
*Includes intangible assets of £768m, or 63p a share
**Includes lease liabilities of £370m