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Serco shares drop as it cuts revenue guidance amid 'less than ideal' market conditions

Published: 09:15 29 Jun 2018 BST

Doctor
“The health facilities acquisition is smaller and later than expected,” Liberum says

Serco Group (LON:SRP) maintained its 2018 profit forecast on Friday but lowered its revenue guidance range, saying market conditions “are less than ideal, particularly in the UK”.

The British outsourcer now expects revenues for the year of £2.7bn to £2.8bn, compared to the £2.8bn to £2.9bn range previously reported.

Shares dropped 4.9% to 95.9p in morning trading.

The company continues to predict underlying trading profit of £80mln, boosted by cost savings under a five-year restructuring plan.

Last year Serco generated revenue of £2.95bn and profit of £69.3mln. 

First half revenues to fall after contracts end

For the first half of the year, Serco estimates revenue of £1.35bn, down 6% on the previous year at constant currency, reflecting contracts that ended in 2017.

Profit in the first half is expected to be £35mln to £40mln, an increase of about 20%, driven by transformation savings.

READ: Serco shares jump as it secures US$900mln US health insurance support contract

Chief executive Rupert Soames said around 80% of the group’s order intake this year will come from operations outside the UK.

"Notwithstanding market conditions that are less than ideal, particularly in the UK, we are responding appropriately and continuing to make progress in line with our strategy," he said.

The company kicked off its restructuring plan in 2014 but its efforts have been undermined by tough market conditions that led to the collapse of rival construction and services outsourcer Carillion (PLC:CLLN)  earlier this year.

Serco to take on Carillion contracts 

Serco expects to take on some of Carillion’s contracts, including for facilities management services at six major NHS hospital sites. The contracts are worth an estimated £70mln in annual revenue and trading profit of £4mln.

READ: Carillion insider dealing probe by the FCA confirmed

Net debt at end of 2018 is projected to reach the upper end of its guidance range of £200mln to £250mln following the proposed acquisition of Carillion healthcare contracts.

Valuation 'still demanding despite weak share price'

Liberum left maintained a ‘sell’ rating and target price of 80p, saying the valuation is “still demanding despite the share price weakness”.

“The health facilities acquisition is smaller and later than expected,” it said. “End markets remain tough, particularly in the UK.”

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