Serco raises profit forecast by ‘replacing’ UK Test & Trace revenue

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Serco raises profit expectations by £30m as contractor ‘replaces’ UK revenue from Test & Trace with more government contracts

  • Test and trace work ended in April, marking a £220m impact on first half revenue
  • But he says global contracts with governments will effectively replace that.
  • H1 trading profit is now expected to be £225m with a ‘strong pipeline’ ahead

Outsourcing company Serco expects half-year profits to be £30m higher than originally forecast.

Serco told investors on Thursday that underlying trading profit is now expected to be £225 million for its first half, approaching levels seen at the same time last year when it was still cashing in on the UK program Track&Trace.

The new guidance is based on “stronger-than-expected trading in the first four months” of 2022, as well as a strong trading outlook and “favorable currency movements”, the company said.

Serco shares jumped 9% to 167p on the news this morning and are trading down around 40% from their recent March lows around 120p

Serco benefits from a “single business-to-government platform” operating globally

Serco’s annual profits rose by £100m from pre-pandemic levels in 2021 as it capitalized on Covid-related government contracts.

The company’s Track & Trace work was completed in April, resulting in an estimated £220m impact on first half revenue.

However, Serco now expects it will be able to “largely replace this decline” with other government work around the world, with first-half revenue expected to be broadly similar to last year at around £2 billion.

This would represent organic growth for the group excluding UK Test & Trace of around 8%.

Serco said gains in North America, Australia, the Middle East, the UK and Europe have contributed to better-than-expected performance so far this year.

“The pipeline of new opportunities remains strong,” Serco told investors, with reported full-year 2022 revenue now expected to reach £4.3bn to £4.4bn, with UTP around 225. million pounds.

In terms of potential headwinds, Serco said it was “well hedged against inflation” but cautioned that “it is difficult to predict the precise impact on revenues and costs.”

“The nature of our contractual arrangements with our customers means that we do not expect costs to increase faster than revenues, although there are timing differences between escalation and cost increases,” said he added.

After distributing dividends of £20m to shareholders in the first half and spending around £30m on share buybacks, Serco expects net debt as of June 30 to be around £170m. pounds, down from £178m at the start of the year.

Serco Group Chief Executive Rupert Soames said: “We’ve had a good start to the year and it’s nice to be able to raise the reported earnings outlook to levels close to last year.

“Customers rely on us to run their critical programs, which has resulted in strong order intake in recent years on contracts that are now generating revenue and profit.

“This is a testament to the effectiveness of our unique business-to-business platform, with its international footprint, resilience, agility and efficiency, which allows us to respond quickly to support the ever-changing priorities of the many governments we serve.”

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