25th May 2016 11:20
LONDON (Alliance News) - Shares in outsourcer Serco Group PLC surged on Wednesday after the group, which has experienced a troubled few years, said profit in 2016 will be ahead of previous guidance thanks to one-off benefits accrued thus far in the first half.
Serco said its financial performance in the first four months of 2016 has been stronger than anticipated, primarily due to good outcomes on a number of commercial negotiations.
The group said the outcome of those talks will sharply increase first half profit, though this will not repeat in the future. The group added the increase in its guidance for 2016 does not change its view on the likely outcome for 2017.
Serco said it now expects underlying trading profit for 2016 to be no less than GBP65.0 million, compared to the GBP50.0 million the group had previously guided. Revenue will also be higher than expected, at GBP2.9 billion against the GBP2.8 billion previously anticipated.
"It is encouraging that we are able to announce an upgrade to our guidance for the year, albeit that much of this improvement comes from items that will not recur," said Chief Executive Rupert Soames.
Serco shares were up 12% on the news to 102.2 pence, the best performer in the FTSE 250.
The group is in the midst of a massive restructuring following the huge loss the group booked in 2014 due to one-off provisions made on asset impairments and loss-making contracts, plus the first revenue decline it had registered since floating in London in 1988.
Serco has also suffered serious reputational damage in recent years, having been blacklisted by the UK government for a time after it and rival G4S PLC were found to have overcharged the state for contracts to tag criminal offenders.
Its focus now is on cleaning up its revenue streams, pulling out of unprofitable contracts and seeing others through to conclusion.
The company said the brighter outlook for 2016 was driven by a series of factors. Several contracts which had been anticipated to end earlier in the year have run on longer, including its deal running traffic management systems in Virginia in the US and a contract with the US army providing career transition assistance to soldiers.
In addition, on contracts which Serco has already exited so far in 2016, including pulling out of its joint venture running the Northern Rail franchise with Abellio, the British arm of the Dutch state rail operator, the final settlement arrangements are likely to be more favourable than had originally been budgeted for.
Within Serco's continuing operations, the company said several contracts have seen better-than-expected trading and, in other cases, the conclusion of negotiations has allowed the group to update its forecasts.
This includes Serco's joint venture managing the operations of the Atomic Weapons Establishment in the UK. At the end of March, Serco said the structure of the joint venture had been altered, cutting its stake in the project. Serco now has a 24.5% stake in the project, down from 33.3% previously. US engineer Jacobs Engineering Inc has the same 24.5% stake in the project, with the rest held by US defence contractor Lockheed Martin Inc.
The group has also seen significant upside on other contracts, including one support defence logistics work in the Middle East.
Serco also said it was running ahead of plan on mitigating losses and costs related to its UK onshore private sector business process outsourcing operations. The group also anticipates a currency benefit for the year, assuming rates remain broadly as they are now.
"We must remain cognisant that, with underlying margins currently around 2%, our profits are a sliver of reward between two very large numbers - revenue and costs - tiny percentage movements in which can lead to large percentage movements in profits," Soames said.
"There remains much to do in order to complete our transformation this year and next, but we are continuing to make good progress on the roadmap we have set out through to 2020," he added.
By Sam Unsted; [email protected]; @SamUAtAlliance
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