Serco shares surge as profit prediction defies outsourcing doubts

SERCO has delivered a surprise upgrade in profit forecasts, sending shares in the outsourcing giant soaring and defying doubts about the health of the sector in the wake of Carillion’s collapse.

The company, with operations ranging from prison management to cleaning and IT support, expects underlying trading profits to increase by up to 40pc this year to between £90m and £95m, up from previous estimates of £80m. Rupert Soames, who has been leading the company through a lengthy turnaround since it ran into trouble four years ago, said the promising numbers reflected improvements across all of its markets.

“By dint of operationally performing much better on our contracts and taking a lot of cost out of the business, our margins are starting to improve,” he said.

But Mr Soames warned the business still had “a long way to go” in its recovery, adding: “These are very small percentage movements and when you’re making margins of 3pc, it’s a small sliver of profit between two very large numbers – your revenues and costs.”

The dramatic demise of Carillion with liabilities of almost £7bn in January has prompted concerns that many companies in the sector are struggling amid tough competition that has wrecked profit margins.

White-collar outsourcer Capita, which provides myriad professional services to central government and big businesses, was forced to tap shareholders for £680m earlier this year to fund its transformation plans after falling to a £513m loss.

Interserve, another rival, agreed a £300m rescue deal with its banks in March. But Serco has managed to increase its margins from a low of 2.3pc last year to an anticipated 3.5pc in 2018. It is aiming to exceed 5pc in the longer term.

The FTSE 250 company now expects revenues to come in at the top end of the previously forecast range of £2.7bn to £2.8bn and net debt to be towards the bottom end of £200m to £250m, partly thanks to the early repayment of a loan note.

Its shares surged as much as 15pc to 103p yesterday. Mr Soames said Serco benefited from its relative lack of reliance on the “very difficult” UK market, which accounts for about 40pc of revenues.

AJ Bell’s Russ Mould said the update showed Serco’s turnaround was heading “in the right direction”.

He added: “They seem to be doing the right things in terms of factors which they can control, but the outside political pressure on outsourcing does not look like it will go away any time soon.”