FTSE 250-listed prison contractor Serco Group PLC (LSE:SRP) saw a 4% hit to its valuation following today’s first-half results, despite revenues and profits yielding no surprises.
Group-wide revenues fell 5% to £2.4 billion, matching forecasts, while a 4% dip in underlying profit to £142 million was actually better than expected.
Panmure Liberum analysts called the 6% margin “strong”; spot net debt came in below the house broker’s expectations; and the dividend was hiked 18% to 1.34p.
Investors might have been slightly rattled by the book-to-bill (BTB) ratio of 82%, meaning Serco saw a lower percentage of orders being received than orders going out in the period.
A sub-100% (BTB) ratio typically suggests a lack of demand for a company’s services. Serco attributed this result to “some larger bids in the UK either being unsuccessful or the existing contract being extended and therefore delaying the procurement”.
Serco is a unique player in the government contracting space. As well as providing defence infrastructure and transport services, Serco operates prisons and immigration and asylum accommodation services in the jurisdictions where it operates.
Alongside G4S (LSE:GFS), Serco handles electronic prisoner tagging contracts. Both groups have been accused of overcharging the Ministry of Justice for these services.
Europe-wide, Serco’s BTB ratio was 70%, falling to just 35% in the far smaller APAC market.
However, the story was markedly different in Serco’s core US market, where the BTB ratio was a solid 127%.
The US accounted for 48.3% of underlying profit in the six months to 30 June, compared to around 40% from the UK.
Margins are consistently better in Serco’s US segment, typically entering the low double digits compared to mid to high single digits in the UK and Europe.
Despite this primary focus on the US market, Serco has not followed other London-listed firms in pursuing a US listing.
Serco boss Mark Irwin batted away a query on the matter in February, despite acknowledging the prospect of higher valuation multiples that have attracted the likes of Flutter Entertainment PLC (LSE:FLTR), CRH plc and Arm Holdings PLC (NASDAQ:ARM) away from the London Stock Exchange in recent times.