Serco shares plummet. But it's all part of a long and winding road to recovery, says its boss

Oliver Gill
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General Views Of Mt Eden Prison Managed By Serco
Serco's management of prisons has come under increasing scrutiny over the last year (Source: Getty)

Serco's share price plummeted over 18 per cent after the FTSE 250 firm posted a 14 per cent fall in profits for the year to December.

But analysts warned investors in the supply services giant would likely take flight owing to a cut to forecast earnings in 2018 and an increased tax bill.

The figures

Total revenue fell from £3.5bn to £3bn with sales from continuing operations falling from £3.2bn to £3.1bn.

Underlying trading profit slid from £95.9m to £82.1m.

Read more: TfL signs £79m deal with Serco to upgrade London's Boris bikes

Basic earnings per share increased from 3.44p to 4.13p with free cashflow broadly stable – the firm posted an outflow of £33m, compared with £35.5m in 2015.

Net debt jumped from £62.9m to £109.3m.

Why it's interesting

Some investors will be scratching their heads this morning as the full-year figures were broadly in line with expectations.

The firm is in the middle of a financial and operational restructure. Joe Brent, an analyst at Liberum, said the "recovery is taking a little longer" adding today's results were "a little weaker than we had expected".

But investors have taken flight for two key reasons, according to Brent.

First is the cut to 2018 forecast earnings by 25 per cent. Also the firm has warned it will not be able to use brought forward tax credits, meaning it will incur an increase tax charge – at an effective rate of 50 per cent

22 February 2017 @ 8:30amSerco Group (SRP)

Serco, which provides an array of services including transportation, call centres and school services, hit has hit the headlines for its work in the prison sector. A number of high profile riots have sprung up in recent months with public sector prison officers pointing the finger at initiatives introduced by private sector counterparts, such as Serco.

Meanwhile, Robin Speakman at Shore Capital Markets said: "Serco's strategic position does appear to be steadily improving to our eyes."

Read more: Serco lands £600m contract with Barts Health NHS Trust in London

Nevertheless, Speakman stressed he wanted to hold off making a new decision on the valuation of the firm. Shore was "awaiting firm evidence of a sustainable improvement in financial performance leading to growth".

What the company said

Chief executive Rupert Soames said:

"These results show that the execution of our five-year plan remains on track. Trading in 2016 was better than we expected... [and] in the second half was in line with the guidance we gave at the time of our half-year results.

"These are the first fruits of the 'transformation' phase of our plan, which we are now about half-way through.

"Our view of likely performance in 2017 remains unchanged from previous guidance.

The road back to prosperity was always going to be long and winding, with many potholes and boulders, but we are making good progress.

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