ii view: Serco shares surge

Covid-19 services such as track and trace are giving this outsourcer a lift. Buy, sell or hold? 

Third-quarter trading update  

• Expects full-year (FY) revenue of £3.9 billion, up from £3.7 billion 
• Expects FY trading profit of up to £165 million, up from £150 million 
• Expects FY Free cash flow of £100 million, up from £62 million
• Expects adjust net debt of up to £150 million, down from £200 million

ii round-up:

Government service provider Serco (LSE:SRP) has raised it full-year sales and profit expectations, largely due to the ongoing demand for its medical administration services under the Covid-19 pandemic. 

Its services to governments globally include fixed and mobile Covid-19 test sites in the UK and the operation of the centre for Medicare and Medicaid services on behalf of the US government. 

Full-year adjusted trading profit of up to £165 million is now expected compared to a prior forecast as low as £135 million. 

Serco shares surged by more than 18% in UK market trading to leave them down just over 10% year-to-date. Shares for corporate services outsourcer Capita (LSE:CPI) are down by more than 80% in 2020. 

Extensions to its contracts to provide test sites and call handlers for NHS Test & Trace both fed into the mix, along with increased immigration work in Australia given restrictions on movement due to Covid-19 

Organic sales for 2020 are now expected to hit 15% compared to a prior estimate of 9%, with both free cash flow increasing and net debt falling more than previously anticipated. 

Serco, which operates across the five sectors of Defence, Justice & Immigration, Transport, Health and Citizen Services, previously withdrew its 2019 final dividend and deferred the 2020 interim payment. An update on the dividend position is expected in December. 

ii view:

Serco employs over 50,000 people across the UK & Europe, North America, Asia Pacific and the Middle East. Its customers are governments or others operating in the public sector. 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, changes in government strategy in relation to the pandemic could impact negatively. The halting of its first dividend payment in five years back in April also proved a setback. However, a forward price/earnings ratio of around 16 times and below the three-and 10-year averages suggests potential room for further share price upside. Good news in relation to the dividend payment could also be pending. In all, with the share price still sat comfortably below the consensus analyst price target, investors with an appetite for risk might consider accumulating. 

Positives: 

• Diversity of both services offered and geographical location
• Health services benefiting from Covid-19

Negatives:

• No dividend payments
• Susceptible to possible government Covid-19 strategy changes 

The average rating of stock market analysts:

Buy