Recovery play Serco Group PLC (LON:SRP), the outsourcing specialist, cheered the market on Thursday with forecast-busting half-year figures.
The shares rose 12.6% to 134p in the first hour of trading, taking the year-to-date gain above 40%, as the company put 2015’s profit warning behind it and revealed trading performance and cost savings are tracking slightly ahead of plan.
The group now anticipates revenue of around £3.0bn, having seen reported revenue from continuing operations slide to £1.49bn in the first half of 2016 from £1.61bn in the corresponding period of 2015.
Underlying trading profit rose to £51.0mln from £46.9mln the year before, and Serco expects the full-year figure will not be less than £80mln.
Having launched an emergency £550mln rights issue late in 2014 after the new management team stumbled across ‘impairments and onerous contract provisions’ of around £1.5bn, the controversial outsourcing firm appears to be getting to grips with its debt mountain.
Net debt, including debt relating to assets and liabilities up for sale, tumbled to £120.2mln at the end of June from £290.3mln a year earlier, and the group now estimates closing net debt at the end of 2016 will be around £150mln, which is equivalent to gearing for banking covenant purposes of around a year’s underlying earning (EBITDA) when excluding non-underlying items; this is at the lower end of the group’s target range of 1-2 times EBITDA.
The health of the balance sheet has not recovered enough yet for the group to recommend resumption of dividend payments.
The group said its outlook for 2017 is not materially changed, other than adjusting for foreign currency movements.
“Visibility beyond the current half year period remains difficult and we note that the major UK government client is in hiatus whilst resetting policy objectives and priorities post Brexit. We do not expect a return to the dividend list at Serco for a considerable period of time,” Shore Capital said.
“Serco has some way to go in its recovery, but we assess the underlying progress evident at the H1 stage as continuing on a positive track; however, we remain some distance from a return to visible profitable growth allowing valuation assessment, in our view,” said Shore’s Robin Speakman, as he reiterated his ‘hold’ recommendation.
Liberum echoed Shore’s thoughts as it said the political uncertainty created by Brexit will result in even slower decision making, hindering Serco’s ability to build a pipeline.
“In particular, there may be a loss of some European business; however, sterling’s weakness results in translation gains. Crudely, a five cents increase in the dollar results in a £2mln benefit to EBIT (slightly less for PBT given the dollar debt),” the broker said, as it reiterated its ‘buy’ recommendation and 120p price target.