Interactive Investor

ii view: outsourcer Serco issues optimistic profit forecast for 2024

Helping governments with services such as immigration and defence. We assess prospects for this FTSE 250 company.

14th December 2023 15:42

Keith Bowman from interactive investor

Full-year 2023 trading update to 31 December

  • Expects revenue up 7% year-over-year to approximately £4.8 billion
  • Expects adjusted operating profit of £245 million

2024 Guidance:

  • Expects full-year revenues similar to 2023
  • Expects full-year adjusted operating profit up 6% to £260 million

Chief executive Mark Irwin said:

"Our strong focus on execution has delivered good performance in the second half, resulting in full year outcomes that are better than those expected when we initially laid out guidance.

“As I approach the end of my first year leading Serco, I am encouraged by our progress, inspired by the commitment of my colleagues, grateful for the support of our shareholders and confident about our growth potential over the medium term."

ii round-up:

Government services provider Serco Group (LSE:SRP) today maintained its 2023 forecasts, but pointed to higher-than-expected profit growth for the year ahead given operational efficiency improvements and the contribution from acquisitions.

Adjusted operating profit for 2024 is now expected to grow by 6% to £260 million compared to City forecasts of £246 million, a potential outcome ahead of the £245 million estimated for 2023.   

Shares in the FTSE 250 company rose around 4% in UK trading having come into this latest news little changed year-to-date and similar to the FTSE 250 index itself. Shares in rival company services provider Capita (LSE:CPI) are down around 15% during 2023.   

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. 

In tandem with the trading update, Serco also announced two bolt-on acquisitions. The €40 million (£34 million) purchase of European Homecare (EHC), a specialist German provider of immigration services. And Climatize, a small but fast-growing Middle East business offering 'zero-carbon' advisory and related engineering services.

Serco left its medium-term revenue and profit estimates unchanged, with revenues forecast to grow at an average of 4% to 6% a year and profits expected to grow even faster. 

Broker UBS reiterated its ‘buy’ rating on the shares post the update. 

ii view:

Coming to the stock market in 1988, Serco today employs more than 50,000 people in assisting governments across the UK & Europe, North America, Asia Pacific, and the Middle East. Examples of services it provides include border control services, assisting the operational management of hospitals or maintaining and servicing military aircraft. 

For investors, execution and reputational risk in running services such as immigration detention centres and prisons cannot be ignored. Costs generally for businesses remain elevated, while the just over half of all revenues generated overseas can be affected by currency movements.

On the upside, diversity of both customer sector and geographical region exists. Financially stretched governments following both the pandemic and the energy price crisis are likely to be seeking further ways to cut costs, while a dividend is being paid again, with the shares offering a forecast dividend yield of around 2.2%.  
    
With the good news around profits and a consensus analyst estimate of fair value at over 220p per share, there are good reason for investors with a longer-term perspective to take a closer look at Serco. 

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

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