ii view: Covid fires Serco profit higher

This Government service provider has benefited from the pandemic. We assess prospects. 

First-half trading update to 30 June

• Expects revenues to be up 19% to £2.2 billion 
• Expects adjusted profit up around 50% to between £120 million to £125 million
• Full-year profit and sales guidance unchanged

Chief executive Rupert Soames said:

"Serco's performance in the first half underlines the trust governments around the world place in us, and our ability to respond at scale and pace to rapidly-changing requirements.”

ii round-up:

Government service provider Serco (LSE:SRP) has outlined its expectation for a 50% rise in underlying trading profit year-over-year as it continued to deliver outsourced Covid-19 services such as track and trace. 

First-half adjusted trading profit of between £120 million and £125 million is forecast, although pandemic related sales are expected to fall in the second half. Management’s trading profit estimate for the year remained at a previously flagged £200 million.

Serco shares fell marginally in UK trading, having gained by close to 30% since pandemic market lows in March 2020. Shares for rival support services company Capita (LSE:CPI) are up by a similar amount. 

Growth in Justice and Immigration and Citizens Services, along with acquisitions at Serco, also helped fuel the profit uplift. Around £340 million of first half revenues are expected to relate to the pandemic compared to £80 million last year.

Order intake was summarised as ‘extremely strong’ in the first half. New contracts signed during the period included those with the UK’s Defence Infrastructure Organisation. 

Serco operates across the five sectors of Defence, Justice & Immigration, Transport, Health and Citizen Services. Management expectations for revenue for the full year to the end of December 2021 also remained unchanged at £4.3 billion. 

First-half results are scheduled for 5 August. 

ii view:

Serco operates across the four regions of the UK & Europe, North America, Asia Pacific and the Middle East. Its customers are governments or others operating in the public sector. It employs over 50,000 people. Other examples of services it helps operate include non-military operation and maintenance functions at military bases and finding jobs for the UK’s Department for Work and Pensions.

For investors, estimating likely future work in relation to Covid-19 and the pandemic is understandably not easy for management. The lack of any dividend payments over recent years also removed a former attraction. But the dividend payment has now recommenced. Current strong trading is also fuelling temporarily increased investment, helping it upgrade IT systems and enhance cyber-security. And the estimated forward price/earnings (PE) ratio is comfortably below the three- and 10-year averages, suggesting that the shares are not expensive. In all, and with analysts estimating a fair value price of 173p, this government service provider continues to regain its shine. 

Positives: 

• Diversity of both services offered and geographical location
• Previously restarted the dividend payment

Negatives:

• Covid-19 work expected to diminish during H2
• Currency movements can drag on performance

The average rating of stock market analysts:

Strong buy