ii view: immigration a boost to Serco profit

This FTSE 250 company helps governments try and save money. Buy, sell or hold?

First-half trading update to 3 July

• Expects revenue up 13% year-over-year to approximately £2.5 billion
• Expects Underlying Trading Profit (UTP) to be up around 8% to at least £140 million
• Expects net debt of £250 million

Guidance:

• Now expects full-year revenues to grow by 6% to £4.8 billion
• Now expects full-year UTP to rise to £245 million, up from a previous £235 million

Chief executive Mark Irwin said:

“Governments around the world are increasingly looking to us to help them with the complex and difficult challenges they face and our enhanced focus on customers, colleagues and capabilities enables us to respond to their needs.  This is driving growth in a number of areas of our international business and enables us to upgrade our guidance for the year."

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ii round-up:

Government services provider Serco Group (LSE:SRP) today upgraded its annual sales and profit estimates as demand for its defence and immigration services helped fuel first half growth.  

Adjusted profit for the current year is now expected to come in at around £245 million, up from last year’s £237 million and a 4% increase from management’s previous estimate.

Shares in the FTSE 250 company rose 7% in UK trading having come into this latest news down a fifth over the last year. Rival services provider Capita (LSE:CPI) is little changed over that time, while the FTSE 250 index is down almost 4%.  

Serco operates across the five sectors of Defence, Justice & Immigration, Transport, Health, and Citizen Services. It operates more than 500 contracts in over 20 different countries. 

Revenues for the first half to early July are expected to rise by 13% to approximately £2.5 billion, with organic growth adding 5%, acquisitions a further 6%, and currency changes the balance.  

Adjusted profit for the first half is expected to be up around 8% year-over-year to at least £140 million. Strong demand for immigration services and a ramp up of contracts signed in previous years will more than offset a drop in Covid-related work and lower Asia-Pacific volumes.

First half results are scheduled for 3 August. 

ii view:

Tracing its roots back to 1929, Serco today has around 50,000 people assisting governments across the UK & Europe, North America, Asia Pacific, and the Middle East. Examples of services it helps deliver include maintaining and servicing military aircraft to operating border control for immigration services or assisting the operational management of hospitals. 

For investors, executional and reputational risk in running such services as immigration detention centres should not be overlooked. Costs generally for businesses remain elevated, the dividend was previously halted, while revenues generated overseas can be affected by currency movements.

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More favourably, governments already financially stretched by the pandemic and soaring energy costs are likely to be seeking further ways to cut costs, including outsourcing services. Serco enjoys diversity of both customer sector and geographical region, the relatively new chief executive will be looking to inject renewed vigour back into group strategy, while the company is paying a dividend again, with a forecast yield of close to 2.5%.  

Consensus analyst estimate of fair value is over 195p per share, implying longer-term support in the City. A stream of contracts and high demand should also keep investors happy.

Positives: 

• Diversity of both services offered and geographical location
• Ongoing government desire to reduce costs

Negatives:

• Elevated costs
• Currency movements can drag on performance

The average rating of stock market analysts:

Buy