Serco boosts profit expectations by £30m as outsourcer ‘replaces’ UK Test & Trace revenues with more government contracts
- Test & Trace work came to an end in April, marking a £220m hit to H1 revenues
- But it says global contracts with governments will effectively replace this
- First-half trading profit now expected to be £225m with ‘strong pipeline’ ahead
Outsourcing firm Serco expects its half-year profits to be £30million higher than initially expected.
Serco told investors on Thursday that underlying trading profit is now forecast to be £225million for its first half, approaching levels seen in the same period last year when it was still cashing in on the UK Track & Trace programme.
New forecasts are based on ‘stronger than expected trading in the first four months’ of 2022, as well as a strong trading outlook and ‘favourable foreign exchange movements’, the firm said.
Serco shares jumped 9 per cent to 167p on the news this morning and are trading up about 40 per cent from their recent March lows around 120p
Serco profits from a ‘unique business-to-government platform’ operating across the world
Serco’s annual profits were up £100million on pre-pandemic levels in 2021, as it capitalised on Covid-related government contracts.
The firm’s Track & Trace work ended in April, resulting in an estimated £220million hit to first half revenues.
However, Serco now anticipates it will be able to ‘largely replace this’ drop off with other government work around the world, with first-half revenues expected to be broadly similar to the same time last year at around £2billion.
This would represent organic growth for the group excluding UK Test & Trace of around 8 per cent.
Serco highlighted gains in North America, Australia, the Middle East, and the UK and Europe as contributing to better-than-expected performance so far this year.
‘The pipeline of new opportunities remains strong,’ Serco told investors, with reported revenues for full-year 2022 now expected to reach £4.3billion to £4.4billion, with UTP of around £225million.
In terms of potential headwinds, Serco said it was ‘well protected against inflation’, but cautioned that ‘it is hard to forecast the precise impact on revenues and costs’.
‘The nature of our contractual arrangements with our customers means we do not expect costs to increase faster than revenues, although there will be timing differences between indexation and cost increases,’ it added.
After distributing dividends of £20million to shareholders in the first half and spending around £30mmilion on share buybacks, Serco expects net debt as of 30 June to be around £170million – down from £178million at the start of the year.
Serco Group chief executive Rupert Soames said: ‘We have had a strong start to the year, and it is pleasing to be able to increase reported profit guidance to levels approaching last year’s.
‘Customers rely on us to deliver their critical programmes, and this has driven strong order intake over recent years on contracts that are now delivering revenues and profits.
‘This is testimony to the effectiveness of our unique business-to-government platform, with its international footprint, its resilience, agility and efficiency, which allows us to respond rapidly to support the ever-changing priorities of the many governments we serve.’