Investors left cold by Serco

An upbeat update from the boss of the outsourcing firm did nothing for its share price today.

Several “buy” recommendations and the first interim dividend since 2014 failed to unlock Serco (LSE:SRP) shares today as investors continue to treat the outsourcing sector with scepticism.

The FTSE 250-listed shares edged up 0.4p to 141p, despite boss Rupert Soames delivering another positive instalment in the company's turnaround story with half-year underlying earnings per share up 75% to 6.75p on revenues 20% higher at £2.2 billion.

The dividend, which was restored with full-year results in February, was 0.8p a share.

Serco continues to expect a 50% rise in adjusted profits for this year as it benefits from the delivery of Covid-19 services such as test and trace and from strong growth in other business area, including justice and immigration work.

• Seven IPOs to watch out for during the rest of 2021
• ii view: Covid fires Serco profit higher

Soames revealed £4 billion of new business and an order book worth £14.1 billion by the end of June.

He said: “Serco has grown very rapidly in the past two years, made possible by the investment we have made since 2014 in transforming our culture, systems and processes.”

Shares are up from 110p in November but are little changed from their level in March, despite a run of positive updates and the support of a number City “buy” recommendations.

Analysts at Liberum reckon the shares are “far too cheap” and should be trading at 180p, while counterparts at Jefferies are at 170p and UBS at 165p.

• Subscribe to the ii YouTube channel and catch all our latest interviews and video content
• Check out our award-winning stocks and shares ISA

Peel Hunt notes that the shares trade on 13.6 times 2021 earnings per share, but believes they deserve to be at 162p.

The broker said after today's in-line results: “The medium-term targets are achievable, and the strong finances provide optionality.”

Investors are likely to be mindful that Serco's Covid-19 work, which contributed 17% or £365 million of revenues in the half year, won't be repeated in future years.

However, Serco argues that the pandemic has amplified underlying drivers of demand in its market, including the opportunities for governments to deliver more services.

Soames added: “It has shown our customers that they can trust us to respond at speed and scale to extremely demanding requirements.”

Mitie shows signs of life

Elsewhere in the outsourcing sector, MITIE (LSE:MTO) shares showed signs of life today after it unveiled a £15 million deal to broaden its expertise in the fast-growing telecoms sector.

The acquisition of DAEL Ventures, which provides services in mobile telecoms infrastructure, is accretive to earnings and has been funded through existing facilities.

Shares rose 4% or 2.5p to 67p, although they remain below the 76p seen in June. Peel Hunt, which has a price target of 92p, said the acquisition was relatively small but presented the company with a potentially significant opportunity.

Mitie chief executive Phil Bentley added that the deal put the company in a strong position to take advantage of the growth prospects arising from the rollout of 5G in the UK.

Mitie is a leading facilities management company, with 75,000 staff after completing its Interserve acquisition in December.