Serco Group PLC (LON:SRP) has said it expects a return to revenue growth in the first half of the year to drive underlying profits at least 20% higher.
The FTSE 250-listed defence contractor and business process outsourcer said revenues for the full year were likely to be towards the top of its £2.9bn-£3bn range, representing growth of roughly 6% following declines for every year since 2014.
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Revenues in the first half are expected to grow by around 6% to £1.5bn, with underlying trading profit of around £50mln benefitting from favourable currency movements.
Profit for the full year is still expected to be close to £105mln, up 13% on last year, which benefited from some non-recurring items.
Chief executive Rupert Soames said, after the “inflection point” last year for Serco, the £3bn-plus of order intake in the first six months of the year has already exceeded management’s revenue forecast for the whole of 2019.
“The strategic advantage of having a strong international footprint shows clearly in these results, with strong revenue growth in North America and AsPac; I am also delighted to see improvement in the trading performance of our UK division, which is showing the benefit of the Carillion health facilities management acquisition completed in 2018,” he said.
Another key event in the period was the agreed acquisition of US Navy design and engineering supplier NSBU in May, with a £140mln placing and bank financing in place to complete the deal in the second half of the year.
Net debt at 30 June, excluding proceeds from the placing, are expected to be in the range of £210mln-£230mln, rising to around £250mln at the year end.
Two-year high
Broker Peel Hunt noted that profit growth has been led by the Americas, in particular the CMS (Center for Medicare & Medicaid Services) contract and an unusually high volume of variable work there.
But analysts were keeping their forecasts unchanged as the second half last year benefited from non-recurring trading items, and against this, 2019 will be muted.
Russ Mould at AJ Bell said the return to growth represents a "significant milestone in the repair job Rupert Soames has done" since taking over in 2014 amid Serco's prisoner tagging scandal.
“The latest update represents a significant achievement when you consider the dire position Soames inherited. However, a strategy of growth for its own sake is not a healthy one and investors must hope further opportunistic M&A activity is balanced against the need to not over-extend the balance sheet.
“Frequent acquisitions can be a danger sign. Deals are just as likely to destroy as to create shareholder value as the costs of integration are often underestimated, the potential benefits are overestimated, or management fail to acknowledge the impact of cultural differences. In this context Babcock’s rebuttal of Serco’s merger proposal earlier this year may prove to be a blessing in disguise.”
Mould also reminded investors to remain cautious about the structural, regulatory and political risks facing outsourcing firms, particularly ones like Serco that are heavily exposed to public spending.
Serco shares were up 6% to 143.6p on Thursday morning, earlier hitting a two-year high of 146.5p.
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