Interactive Investor

ii view: pandemic winner Serco ups profit forecast

15th November 2021 15:27

Keith Bowman from interactive investor

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Covid related work in the UK and Australia is higher than expected. We assess prospects.

Trading update to 12 November 2021

  • Now expects full year (FY) revenue of £4.4 billion, up from £4.3 billion
  • Expects FY adjusted profit of at least £225 million, up from a previous £200 million

ii round-up:

Government services provider Serco (LSE:SRP) today raised its full-year profit estimate as Covid related work in both the UK and Australia exceeded forecasts. 

The outsourcer, which operates Covid-19 test centres among its services, raised its expectation for full-year trading profit to at least £225 million from a prior £200 million. Revenue of £4.4 billion is now forecast from a previous £4.3 billion. 

Serco shares rose by more than 3% in UK trading, leaving them up by over a quarter since pandemic induced market lows back in March 2020. Shares for rival support services company Capita (LSE:CPI) are up by over 50% in that time.

Serco left its forecasts for the full-year 2022 unchanged as it expects reduced pandemic related work to be countered by new work secured in 2021 and growth in its core non-Covid-19 related business.

Serco operates across the five sectors of Defence, Justice & Immigration, Transport, Health and Citizen Services.

Immigration-related contracts in the UK and Australia and healthcare insurance eligibility services in the US also added to the upgrades for the current full-year. As did contract wins expected to be made in 2022 but recently confirmed. 

Given the challenges of working at the forefront of the pandemic, a staff bonus payment will for a second-year running be paid. 

Full-year results are scheduled for 24 February. 

ii view:

Serco operates in the UK & Europe, North America, Asia Pacific and the Middle East. Examples of services it helps operate include non-military operation and maintenance functions at military bases and helping people find jobs for the UK’s Department for Work and Pensions (DWP). Most of its profits now come from outside the UK. 

For investors, management expectations for Covid related work to decline in 2022 need to be remembered. As does adjusted net debt up from 2020 and pushed higher by acquisitions, plus exposure to currency movements given its overseas business. 

On the upside, trading momentum for now remains in the company’s favour, and a previously reinstated dividend payment leaves the shares on an estimated forward yield of around 2%. An estimated price/earnings (PE) ratio below both the three- and 10-year averages also suggests the shares are not obviously expensive. For now, and with the consensus analyst estimate of fair value standing at 173p per share, there's enough here to keep long-term investors interested. 

Positives: 

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

Negatives:

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

The average rating of stock market analysts:

Strong buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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