Serco shares jump 16 per cent as it swings to profit

 
Jessica Morris
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A Serco van thought to be carrying Wikil
Serco has been enacting a turnaround plan (Source: Getty)

Serco shares closed up 10.28 per cent to 130.90p today, after the outsourcer hiked its profit forecast for the second time this year.

The figures

The FTSE 250-listed company made a pre-tax profit of £58.1m in the six months ended 30 June, up from a loss of £16m a year earlier. This came despite revenue falling seven per cent to £1.49bn during this period.

One-off factors such as the resolution of business issues helped underlying trading profit jump nine per cent to £51m, while less liabilities from loss-making contracts boosted trading profit by 14 per cent to £71.7m.

The better trading performance, coupled with favourable currency movements in sterling as a result of the Brexit vote, prompted Serco to increase its 2016 guidance for underlying trading profit from £65m to no less than £80m. It left 2017 targets unchanged.

Why it's interesting

Serco has suffered over the last few years due to a succession of scandals, including one surrounding its tagging of criminals. But its current chief executive, Rupert Soames, appears to be turning things around.‚Äč

Soames, who is a grandson of wartime prime minister Winston Churchill, had been a ardent advocate for the UK remaining in the European Union. Prior to the referendum, he'd said that Churchill would've wanted to stay.

Serco said today that Brexit presents "both risks and opportunities" because regulatory changes and increased immigration could could create more work, however progress could be slow. At the same time, an economic slowdown would hit demand and squeeze the UK government's finances.

What Serco said

Soames said: "Performance for the first half of the year has been better than we expected. Although much of the improvement came from items that will not recur, it reflects the result of a lot of hard work and successful resolution of a number of commercial issues."

"Since our last update in May, our trading performance and cost savings are tracking slightly ahead of plan, and recent foreign exchange movements have increased the value in sterling of our overseas earnings."

"Accordingly, we are increasing our profit guidance for 2016, although it is important to note that our view of the outlook for 2017 is not materially changed, other than adjusting for foreign currency movements."

What the analysts said:

Broker Shore Capital said: "Serco has some way to go in its recovery, but we assess the underlying progress evident at the first half stage as continuing on a positive track, however, we remain some distance from a return to visible profitable growth allowing valuation assessment, in our view."

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