Outsourcer Serco Group PLC (LON:SRP) maintained its guidance for 2018 underlying trading profit as margins grew on the back of an improved operational performance and cost cuts as part of its restructuring.
The company expects underlying trading profit to rise 30%-40% to £90mln-£95mln, in line with the upwardly revised estimates provided in September, thanks to one-off items such as end-of-contract settlements and other commercial negotiations.
Serco shrugs off challenging UK market
However, revenue is forecast to drop 4% to £2.8bn, reflecting a tough UK market for outsourcers. Serco’s order intake totalled £2.5bn for the year, driven by its international businesses.
“Given the difficulties in our markets in the UK, we think this would be a robust performance, underlining the importance of our strong position internationally,” the group said.
“Together with the acquisition of the Carillion health facilities management contracts, we also expect to see significant growth in our order book.”
Serco bought 15 healthcare contracts from collapsed Carillion at a discounted price in February.
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The group expects to end 2018 with net debt of £200mln, which is better than previously predicted, and it anticipates returning to positive free cash flow after three years of outflows.
Serco expects further improvement in 2019
For the 2019 financial year, the group predicts revenue of £2.8bn-£2.9bn and underlying trading profit growth of “mid-single digits” to £95mln-£100mln, in line with market expectations.
Underlying earnings per share for 2018 and 2018 is expected to be a further 5-10% ahead of the current consensus forecast due to a lower effective tax rate.
“With revenues no longer reducing, cash generation turning positive and the benefit of a strong balance sheet, we are pleased with progress, and we expect further improvement in 2019,” said chief executive Rupert Soames.
He said the group's operations and transformation plans "continue to deliver an organisation which is leaner, fitter and much stronger".
Shares jumped 7.4% to 96.1p in morning trading.
Liberum upgrades recommendation
Liberum raised its rating on the stock to 'hold' from 'sell' and lifted its target price to 105p from 80p, citing its upgraded earnings estimates and a stronger balance sheet.
The broker increased its fully diluted earnings per share forecasts for 2018 and 2019 by 18% and 14%, respectively. It lowered its full year net debt estimate to £200mln from £213mln.
"We estimate the order book up 4% from the H1 18 level of £11.0bn to £11.4bn, with high re-bid success but limited new contracts, which are required for growth," Liberum said.
Liberum noted that the Middle East is weak and UK markets remain tough with limited government contract awards amid Brexit uncertainty.
However, US outsourcing is strong and President Donald Trump has backed US$750bn of defence spending for 2020.