ii view: outsourcer Serco optimistic about 2025
Helping governments service military jets and answering queries about health insurance. We assess prospects for this FTSE 250 company tasked with saving taxpayers money.
19th December 2024 11:40
by Keith Bowman from interactive investor
Full-year trading update to 31 December
- Expects revenue down 2% year-over-year to around £4.8 billion
- Expects adjusted operating profit up 9% to £270 million
2025 Guidance:
- Expects full-year revenues to be flat at £4.8 billion
- Expects full-year adjusted operating profit of around £260 million, down from £270 million in 2024
Chief executive Mark Irwin said:
"We are proud of the progress throughout 2024, reporting a strong financial performance and delivering important services to our customers in a dynamic global environment.
“Overall, we are confident in the Group's outlook, built on the innovation, expertise and efficiency we bring to our partnership with governments.”
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ii round-up:
Government services provider Serco Group (LSE:SRP) today offered optimism about 2025 given fiscal and geopolitical challenges facing governments, driven by continued growth in both North America and Europe.
Growth in US defence services is expected to help offset a 7% reduction in UK and Australian immigration sales during 2025, potentially leaving revenues unchanged from the expected outcome of £4.8 billion in 2024. Adjusted operating profit for the year ahead is forecast to fall to £260 million from an expected £270 million in 2024, fuelled by factors including contract ramp-ups and hindered by reduced immigration demand and increased costs following recent UK Budget tax increases.
Shares in the FTSE 250 company rose 6% in UK trading, having come into this latest news down around 14% year-to-date. That’s better than a one-third retreat in shares for corporate services focused outsourcer Capita (LSE:CPI), but behind a 4% gain for the FTSE 250 index in 2024.
Serco provides services to government departments including defence, immigration, justice, healthcare, and customer services both in the UK and overseas.
The Hampshire headquartered company flagged much improved order intake during the second half, with its pipeline of new business opportunities set to end the year at highest level in more than a decade.
Expected free cashflow for 2024 is expected to improve by £20 million from 2023 to £170 million, helping adjusted group net debt to come in at around £145 million, £20 million better than previously forecast.
Along with an increased interim dividend of 1.34p per share already paid, shareholder returns have included a £140 million buyback programme, leaving total buybacks since 2021 at £340 million.
Full-year 2024 results are scheduled for 27 February.
ii view:
Started in 1929, Serco today employs more than 50,000 people. It helps governments to design services, integrate systems, outsource case management and engineering services, and oversee assets & facilities. The UK and Europe accounted for its biggest slice of sales at 50% in 2023, followed by North America at 28%, Asia Pacific 17% and the Middle East the balance of 5%.
For investors, wages and related tax contributions are rising, offering cost headwinds. Changes of government can bring new priorities and arrangements with elections possible in both Germany and France before long. Reputational and execution risk in running services such as immigration detention centres and prisons cannot be ignored, while currency risks given a half of sales are generated overseas, warrant consideration.
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On the upside, financially stretched national finances following the pandemic and the energy price crisis now likely leave many governments looking to reduce spending and lower debt. Diversity of customer sector and geographical region exists. A ratio of net debt-to-adjusted profit of 0.6 times now leaves leverage at Serco comfortably below management’s comfort target of up to 2 times, while shareholder returns include both a forecast dividend yield of 3% as well as share buybacks.
In all, and despite risks, government objectives to cut national debt and a consensus analyst fair value estimate above 210p per share look to offer hope for the long term.
Positives:
- Diversity of both services offered and geographical location
- Ongoing government pushes to lower costs
Negatives:
- Elevated costs
- Currency movements can drag on performance
The average rating of stock market analysts:
Buy
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