1st Jul 2015 10:29
LONDON (Alliance News) - Outsourcer Serco Group PLC on Wednesday said trading in the first half of 2015 has been slightly better than anticipated, though it maintained its expectations for the full year and still forecasts a fall in revenue and flat trading profit in the half-year period.
Still, shares in the company surged higher on Wednesday morning on the back of the news, up 9.9% to 129.7 pence to be comfortably the best performer in the FTSE 250.
The FTSE 250-listed company said it expects revenue in the first half to the end of June to be at least GBP1.7 billion, down from GBP2 billion a year earlier. The fall in revenue has been driven by an organic decline, as anticipated by the company, particularly reduced volumes and rates from its Australian Immigration Services deal and the end of its contracts for the Docklands Light Railway and the National Physical Laboratory in the UK, along with US intelligence agency support deals and visa processing work.
The company said it signed contracts with a total value of around GBP1 billion in the first half amid quiet trading and few major bidding outcomes. The majority of the value of the new deals was weighted to existing relationships, Serco said, with extensions and successful rebids in the period including a business process outsourcing deal with a major financial services company, an air traffic control deal in the US, and an IT support services contract for European agencies.
Serco said it expects trading profit in the first half to be no less than GBP45 million, flat year-on-year, including the benefit of the company utilising Onerous Contract Provisions, which it booked in its 2014 results. Free cash outflow for 2015 is still expected to be around GBP150 million, weighted to the first half, and the group said its recent rights issue reduced its debt pile by around GBP500 million.
Expectations for the full-year remain intact, Serco said, with revenue expected to be around GBP3.5 billion and trading profit around GBP90 million. That would compared to revenue of GBP3.96 billion and a trading loss of GBP632 million in 2014.
The company added the process of offloading its offshore private sector business process outsourcing arm, Intelenet, is ongoing, and it is considering a range of options for the division. A Sky News report in May had suggested Serco was close to securing a USD400 million sale of the Intelenet business, but nothing concrete has yet been revealed by the company.
Serco added that it is making good progress in exiting loss-making contracts and expects the run-rate of losses from these contracts to be significantly lower in 2016 than they will be in 2015.
"We have ended the first half in reasonably good order and are making progress in implementing our plans. Whilst our recovery is at an early stage, and there will be bumps along the road, I am confident that we are doing the right things, with a stronger balance sheet and supported by an excellent management team," said Chief Executive Rupert Soames.
Shore Capital analyst Robin Speakman said the statement from Serco was "encouraging", but said the recovery of the company "remains a long-term process". In a note published in June, Speakman had said he expects a "significant fall" in profit and revenue for Serco this year and said the first half, in terms of contract awards, had appeared quiet.
In an earlier note, however, published after the General Election in the UK in May, Speakman said Serco may be the greatest beneficiary of the majority Conservative government taking power, providing the company with a "positive environment to complete its own restructure and rebuild a contract pipeline in the UK". Speakman acknowledged in that note, however, that Serco is not set to produce earnings growth until 2018.
Liberum, which has a Hold rating and 135 pence price target on Serco, said the company is trading "a little better", though it has concerns on the weaker order book and the lack of detail on Serco's pipeline. Still, Liberum analyst Joe Brent said a few contract opportunities are in play for the company, including back-end processing for passports in the US and an opportunity to win a fire services deal for the Ministry of Defence in the UK.
Serco is in the midst of a restructuring of its business to focus on the provision of services to the public sector market, following a review conducted of the business by new Chief Executive Soames, which ultimately led to it booking a GBP1.31 billion writedown in 2014. For that year, the company also posted its first fall in revenue as a listed company as it suffered the fall-out from two troubled contracts it held with the UK government, the issues from which led to it being banned from winning any new government deals back in 2013.
As part of the strategic review, Serco said it will dispose of a number of non-core businesses, with the proceeds from the sales to be used to pay down its debt. This will include its Environmental Services and Leisure businesses in the UK, the Great Southern Rail business in Australia, and the majority of its private sector outsourcing businesses. The sale of the Great Southern Rail arm was sealed in late March, when Serco offloaded the business to Australian private equity house Allegro Funds for GBP2.5 million in cash.
At the end of May, the company hired Roy Gardner, the former chief executive of British Gas-owner Centrica PLC and former chairman of catering and outsourcing company Compass Group PLC, as its new chairman. He replaced Alastair Lyons, who stepped down after taking responsibility for the problems uncovered in the strategic review of the company.
By Sam Unsted; [email protected]; @SamUAtAlliance
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