- First half bolstered by organic growth and acquisitions
- Defence and immigration services drive upgrade
- Full year earnings now seen rising
Investors in unloved outsourcing specialist Serco Group (SRP) were jumping for joy on news the firm was increasing its full year profit guidance after a stronger-than-expected first half.
The shares, which earlier this week were plumbing 12-month lows around 135p, leapt 10% to 157p.
DOUBLE-DIGIT FIRST HALF GROWTH
Despite the absence of Covid-related work this year, first half revenue is seen rising 13% to £2.5 billion with 6% of the increase due to organic growth, 5% due to acquisitions and 2% due to favourable currency movements.
Across its international portfolio the firm said it saw growth in the defence sector and ‘particularly strong growth’ in the immigration sector.
‘We have had a strong start to the year, including robust demand for immigration services supported by the effective integration of ORS into our global platform, growth in defence services, and our successful rebid of the CMS contract’, said chief executive Mark Irwin.
ORS is a European immigration firm which Serco acquired in September 2022, while the CMS contract was awarded to the firm in February 2023 by the US Department of Health and is valued at $690 million.
‘Governments around the world are increasingly looking to us to help them with the complex and difficult challenges they face and our enhanced focus on customers, colleagues and capabilities enables us to respond to their needs. This is driving growth in a number of areas of our international business and enables us to upgrade our guidance for the year’, added Irwin.
The firm now sees revenue reaching £4.8 billion, 6% more than last year and 4% higher than its previous estimate, due to better than expected organic growth.
Underlying trading profit for the first half is seen at £140 million, 8% above last year, while for the full year the forecast has been raised to £245 million meaning an increase of 3% on 2022 rather than a 1% drop as previously guided.
EXPERT VIEWS
‘Serco has shown it is still possible to make a good living by offering contracted services to global governments and that’s reflected in today’s latest upgrade to earnings forecasts’, commented AJ Bell investment director Russ Mould, noting immigration and defence services were ‘two big pressure points for lots of countries’, helping to drive growth.
Robin Speakman at Shore Capital described Serco as ‘an opportunistic investment prospect’ given the shares were recently trading at year-lows.
Fundamental multiples for the stock are ‘too modest’ added Speakman, with a pre-upgrade full-year price-to-earnings ratio of 10.1 times and an EV to EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) ratio of 5.9 times.
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (James Crux) own shares in AJ Bell.
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