ii view: Serco becomes a Covid winner

Growth in the order book and the first interim dividend payment since 2014. Buy, sell or hold?

First-half results to 30 June 2021

• Revenue up 20% to £2.2 billion
• Adjusted earnings per share up 75% to 6.75p 
• Interim dividend of 0.8p per share
• Order book up 4.4% to £14.1 billion 

Chief executive Rupert Soames said:

“We have had extremely strong order intake, and the book-to-bill ratio was 190%, which bodes well for the future.  Our three largest divisions - Asia Pacific, North America and UK & Europe - all delivered good growth, and this reflects both the trust our government customers have shown in us during the pandemic, and Serco's ability to respond to their requirements with speed and at scale.

Our guidance for 2021 remains unchanged from that stated in our Pre-Close Update on 30 June 2021, except for cash and net debt, which has been updated following the very strong first half performance.

ii round-up:

Serco Group (LSE:SRP) is a provider of services to governments both in the UK and overseas. 

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

For a round-up of these latest results, please click here. 

ii view:

Serco operates across the four regions of the UK & Europe, North America, Asia Pacific and the Middle East. It employs over 80,000 people. 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). Over 60% of its profits now come from outside the UK. 

For investors, the approximate 17% of first half Covid related revenues are expected to decline over the second half as vaccination programmes impact and the pandemic begins to reduce. Pushed by acquisitions, adjusted net debt is up, although remains within management targets, while revenues generated overseas can be hindered by currency changes. 

More favourably, guidance for the full year stayed largely unchanged, with the order book growing by 4.4% to £14.1 billion from the end of 2020. Its DWP contract is expected to move into profit come 2022 and a previously reinstated dividend payment leaves it sat on an estimated forward yield of just under 2%. In all, and with analysts estimating a fair value price of 173p per share, we believe this government service provider remains worthy of ongoing investor support.

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’