An unscheduled and positive trading update from outsourcing business Serco (SRP) has driven a 15% surge in its share price to 101.7p.
The statement itself is relatively light on detail but the salient detail is that results will be ‘meaningfully’ ahead of consensus expectations. Investors will naturally be wondering if this puts the business in a stronger position to resume dividends.
Revenue guidance is lifted from between £2.7bn to £2.8bn to the upper end of that range and trading profit from £80m to a new range of £90m to £95m, representing up to a 40% increase year-on-year.
Net debt is expected to be at the lower end of the £200m to £250m range, when previously Serco had guided for borrowings to be towards the top end. This adds up to a lower net debt to earnings ratio of less than 1.5 times by the year end.
The company intends to update on 2019 expectations when it unveils its next trading update on 13 December. It is worth noting that as well as cost-cutting and strong operating performance the outturn for 2018 will benefit from several non-recurring items such as end-of-contract settlements.
Notably this update has only helped restore the shares to where they were trading a few weeks ago and they are still trading at just over a quarter of their value back in 2013.
SO WHAT ABOUT THE DIVIDENDS?
Shore Capital analyst Robin Speakman is encouraged by the latest performance though not sufficiently to budge from his ‘hold’ recommendation on the stock.
He says: ‘This statement is clearly welcome news, guidance for the 2019 financial year is now foremost in our minds and a return to positive cash generation leading to a return to the dividend list.’
The consensus forecast among analysts is for Serco to start paying dividends again either during or at the end of the 2019 financial year.
AJ Bell investment director Russ Mould says: ‘Today's update from Serco suggests a turnaround of the group, previously derailed by financial issues, various contract problems and customers losing faith in the business, is once again heading in the right direction.
‘The next focus may be on whether the company can return to a positive cash generation and even resume dividend payments, which have been absent of late.
Referring to chief executive Rupert Soames and the rest of the management team, Mould adds: ‘They seem to be doing the right things in terms of factors which they can control, but the outside political pressure on outsourcing does not look like it will go away any time soon.’
