Caley Sleeper operator Serco on track
L Upbeat outlook despite company facing challenges in some markets
Serco, the outsourcing heavyweight that runs the Caledonian Sleeper rail franchise and Northlink Ferries, has insisted it remains on track for fullyear expectations despite seeing half-year profits reverse by almost a third.
The group saw underlying trading profits drop to £35.3 million for the six months to the end of June, down from £50.6m a year earlier.
But, releasing its interim results yesterday, the firm said the drop was expected as it came up against “challenging” comparative results from a year ago and stuck by its outlook for the year as a whole.
Chief executive Rupert Soames, the former boss of Glasgow-based temporary power supplier Aggreko, told investors: “Notwithstanding the well-flagged decline in profits compared with the first half of 2016, trading in the first half of 2017 keeps us on track to achieve our expectations for the full year, and represents an improvement in underlying trading profit on the second half of 2016.”
The results come as Serco is facing a two-week long strike from its employees at four hospitals in London in protest at below inflation pay deals.
The group cheered an “exceptionally” strong flow of orders, having secured its biggest ever contract in June after winning a £1.5 billion deal to run what will be Australia’s largest prison. Serco has been signed up to manage the New Grafton Correctional Centre in New South Wales.
Soames said the group’s order intake was “striking” having increased to £2.4bn after the Grafton contract, but added a note of caution as some of the firm’s markets have become “markedly more unpredictable”.
He said: “The most striking element is the order intake, which for two successive periods has been very strong, totalling some £4bn in the last 12 months, and we have succeeded in maintaining the pipeline at broadly similar levels despite strong order conversion. However, as we said in June, we remain sensibly cautious in the light of the political environment in several of our markets becoming markedly more unpredictable.”
The group is in the middle of a turnaround following a string of profit warnings and the prisoner tagging scandal in 2013. It was also hit in recent years by rising costs on a deal to provide accommodation to UK asylum seekers.
The board has not declared an interim dividend for 2017.
Shore Capital analyst Robin Speakman, who has a “hold” recommendation on the shares, said: “Overall we believe that Serco’s performance remains on track. Guidance for the full year is retained at this juncture: revenue of £3.1bn with trading profit in a range of £65m to £70m (our estimate £68m).
“Our assessment is that, overall, market traction is slowly building and we expect stronger earnings and cash flow performance to emerge through FY2018F [financial year 2018].
“Risks remain however, not least contracts relating to healthcare delivery in the US, as well as on a potential requirement for further provisioning in historic business. We expect visibility to improve on these issues over the next year however.”
Serco said net debt increased by £40m during the period to £149m.
“The most striking element is the order intake, which for two successive periods has been very strong, totalling some £4bn in the last 12 months”
RUPERT SOAMES, CEO