ii view: Serco raises hopes for 2021

Revenue up, profit up and dividend payments under review. Investors take a closer look. 

Full-year trading update to mid-December

• Expects revenues to be up 19% to £3.9 billion 
• Expects adjusted profit up around 35% to between £160 million to £165 million
• Expects adjusted net debt to be below £100 million at the end of December

Guidance:

• 2021 adjusted profit expected to be similar to 2020

ii round-up:

Government service provider Serco (LSE:SRP) today reaffirmed robust trading for the current year, underpinned by its part in battling Covid-19. It also forecast 2021 profits marginally higher than City forecasts. 

Services to the UK government, including fixed and mobile Covid-19 test sites, helped a previously flagged 35% improvement in adjusted profits for this year. An acquisition and rewinning of a prison contract in Australia fed into a marginal increase in 2021 expectations. A reconsideration of its suspended dividend payment is also to be made at the February full year results. 

Serco shares rose by more than 2% in UK trading, leaving them down by around a fifth year-to-date. Last year they were up nearly 70%. Shares for corporate services outsourcer Capita (LSE:CPI) are down by more than 70% in 2020.

Estimated adjusted profit of £165 million at Serco for 2021 is 2% ahead of the current consensus analyst estimate. Contract wins over 2020, and improvements in businesses away from the pandemic, are expected to offset lower volumes and profit from running Medicare and Medicaid services for the US government, plus the ending of its UK Atomic Weapons Establishment contract in June. 

Having previously accepted government financial aid in both the UK and US, it is now returning that support along with paying a bonus to many of its frontline staff. 

Serco, which operates across the five sectors of Defence, Justice & Immigration, Transport, Health and Citizen Services, previously withdrew its 2019 final dividend and paid no 2020 interim payment. Following the strengthening its balance sheet, it now intends to buy up to £40 million of its own shares over coming months.

ii view:

Serco operates across the UK & Europe, North America, Asia Pacific and the Middle East. Its customers are governments, or others operating in the public sector. During 2020 it has created, both directly and with its sub-contractors, over 10,000 net new jobs worldwide, most of them supporting governments' Covid-19 response. Other examples of services it helps operate include the US Federal Emergency Management Agency and the Anti-Terrorism/Force Protection contract for US Naval Facilities.

For investors, there is a risk that its non-medical related businesses do not fully compensate for an expected decline in Covid-19 activity next year. The halting of its first dividend payment in five years back in April also proved a setback. But an estimated forward price/earnings ratio of around 15 times is below the three-year average, suggesting potential for further share price upside. Good news in relation to the dividend payment could also be pending. In all, and with momentum at the company ongoing, the shares will likely pique interest among higher risk investors.

Positives: 

Diversity of both services offered and geographical location

Commencing a £40 million share buy-back scheme

Negatives:

No dividend payments

Covid-19 work expected to diminish over 2021

The average rating of stock market analysts:

Buy