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Serco: further wins needed

The next six months will be crucial for the outsourcer, as investors watch for a recovery
August 7, 2017

Outsourcer Serco’s (SRP) recent success in winning the £1.5bn Grafton prison contract in Australia helped push the order book to £10.8bn at the end of June 2017. The £4bn order intake in the past 12 months is the biggest haul since 2012. Investors sent the share price higher despite a 30 per cent drop off in underlying trading profit to £35.3m. This included £11m in one-off trading items booked in the first half of 2016, as well as increased bidding costs in this year's first half.

IC TIP: Hold at 116p

The size of the Grafton contract flattered the group’s win rate by value, pushing it up to 80 per cent. However, win rates by volume were up to 50 per cent and for rebids and extensions it was higher at 90 per cent. Contracts won included a cleaning and catering contract for University Hospital Southampton worth around £125m and a $101m (£77m) supply chain management contract for the US Navy.

Chief executive Rupert Soames has previously warned the bid pipeline is heavily front loaded, with many contracts to be decided in the next six months. As a result, it is expected to decrease from its current £7.9bn level by the end of the year, and may continue to fall through 2018.

Analysts at JP Morgan Cazenove are forecasting adjusted pre-tax profit of £53m for the full year 2017, giving EPS of 2.23p (FY2016: £69m/4p).

SERCO (SRP)    
ORD PRICE:116pMARKET VALUE:£ 1.27bn
TOUCH:115.7-116p12-MONTH HIGH:151pLOW: 109p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:24.7p*NET DEBT:55%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20161.4958.15.00nil
20171.5114.1-1.68nil
% change+1-76-134-
Ex-div:na   
Payment:na   
*Includes intangible assets of £640m, or 58.2p a share