Serco Group PLC (LON:SRP) said it expects to achieve profit at the top end of its guidance range in 2017 after announcing a deal with struggling rival Carillion PLC (LON:CLLN).
Shares jumped 12.74% to 107.50p in morning trading.
READ: Serco shares plummet as it backs away from bid for Middle East rail contracts
The construction contractor said order intake during the year has been strong at £3.0bn, representing a book-to-bill ratio of over 100% for the first time since 2012.
Order intake includes a deal to build and operate the Grafton prison in Australia, the group's largest-ever contract win.
It also includes new contracts with the Southampton NHS Foundation Trust, the US Army Installation Management Command and US Navy Fleet Readiness Centers.
However, revenue is expected to be just under £3bn, short of its previous expectations, due to the impact of foreign exchange headwinds and the timing of contracts.
The group also warned that the pipeline of new bid opportunities will be “noticeably lower” by the time it reports results for 2017 at between £4-5bn.
Serco inks definitive purchase agreement with Carillion
Serco said refilling the pipeline is “unlikely to be a smooth progression” given the effect of the timing and scale of individual opportunities but has signed a definitive agreement to buy a large part of Carillion’s UK healthcare facilities management business that will boost its order book.
A portfolio of Carillion’s UK healthcare facilities management contracts and associated ancillary contracts and assets which relate to fifteen sites will be transferred to Serco on a phased basis.
An agreed proportion of the total consideration of approximately £47.7mln will be payable in instalments on the transfer of each facilities management arrangement to Serco, with the aim of receiving the bulk of the proceeds in the second and third quarters of 2018.
Serco said the contracts have an average unexpired period of around 14 years and are expected to add around £1bn to the order book.
Carillion issued its third profit warning in five months in November and said it was heading towards a breach of debt covenants and would need fresh capital.
Profit and revenue guidance
Serco expects underlying trading profit at the top end of its previous guidance range of £65-£70mln in 2017, up 10% on the previous year.
In fiscal year 2018, it predicts underlying trading profit will rise to about £80mln on flat revenue of about £2.9bn, including the adverse impact of current foreign exchange rates.
Further afield it estimates “further good growth” in underlying trading profit in 2019, boosted by transformation savings.
Serco said it remains “broadly on track” on costs and onerous contracts, but in some markets – particularly the UK- growth has slowed.
The timing of reaching a long-term goal of 5% to 7% revenue growth will depend on "when demand reverts to trend in our target markets”.
“Beyond 2019, our long term ambitions for margins and revenue growth remain intact, but the timing of achieving these remains subject to seeing improvements in the trading conditions across our markets,” said chief executive Rupert Soames.
“In the meantime, we continue to deliver against our plans and make good progress against our strategy."
Market challenges
Liberum left its rating at ‘sell’ on the stock with a target price of 95pm saying: “Management is liked and respected, but the market is challenging and they are not magicians.”
It added: “The political landscape remains hard, with challenges in the UK (political uncertainty), US (Obamacare and budgetary uncertainty) and Middle East (poor relations between Saudi Arabia and Qatar).”
The broker reduced its 2017 revenue estimate from £3.06bn to £2.97bn, compared £3.05bn in 2016 but raised its profit estimate from £67.0mln to £69.0mln.