Thursday 21 February 2019 8:47 am | Updated: Monday 03 June 2019 12:32 am

Serco seeks to capitalise on Brexit contract chaos as financial turnaround continues

Outsourcing giant Serco said it could benefit from Brexit in the coming months if the government “needs help quickly,” raising its sales forecast for the coming year.

"If we’re going to take back control, we’re going to need people to do the taking-back and the controlling,” chief executive Rupert Soames told Morning Wire.

“The government has already recruited an extra 20,000 civil servants. There is a small chance that in a hard Brexit they might need more people."

In Serco's full-year results, it said 2018 had marked an “inflection point” in its long-term recovery after several years of declining profits and revenues, with a 40 per cent profit boost for the year.

Shares were on the up in early trading, rising 3.7 per cent this morning.

The figures

Profits rose from £69.3m to £93.1m, while revenue fell slightly from £2.9bn to £2.8bn. Underlying earnings per share were up 63 per cent on 5.21p from 3.36p the year before while free cash flow was £25m.

Net debt increased by one-third, however, from £141.1m to £188m.

The firm increased its 2019 outlook on profit, from a range of between £95m and £100m to a new target of £105m. The group's order intake was £2.9bn for the year, with more than 40 contract awards worth more than £10m each.

Why it’s interesting

When Soames took charge of the outsourcer in 2014, Serco was on the brink of a crisis. It had just issued a profit warning and announced it would seek £170m in emergency funding. Now, the firm looks on more secure financial footing with rising profits and a “recent strong order intake,” which it said will help it “outperform a weaker market in the next few years, absent unforeseen headwinds or major rebid losses.”

"You could ascribe it to management genius. You could equally say we were first in, first out," Soames told Morning Wire. "We got into trouble early and we got out of it early as well."

"We raised our equity and we refinanced our debt, but it’s been a long slog, it’s taken four years to get back to the point where profits are growing again."

Indeed, the situation for some of its competitors is dire: in the wake of Carillion’s collapse, many other outsourcers’ weaknesses have been laid bare. Interserve is struggling to keep its head above water and Kier Group is in such financial turmoil its chief executive was forced to resign last month by a powerful cabal of shareholders.

Serco, on the other hand, won its largest ever contract in January, a decade-long £1.9bn deal to provide accommodation and support for asylum seekers across the UK.

“Although the UK Government's appetite for new projects has been reduced, frontline services of the type we provide tend to be non-discretionary and critical in nature,” it said. “Our core competence in providing vital, frontline, people-enabled services, having been regarded as somewhat "below the salt", is now, we believe, an important asset.”

Serco has also been pushing to expand its presence overseas for several years now, and 80 per cent of its contract wins in the last two years were outside the UK.

What Serco said

Soames said: “2018 marked an inflection point for Serco. After several years of declining revenues and profits, underlying trading profit at constant currency rose 40 per cent, reported operating profit grew fourfold and revenue started to grow again in the second half.

In its outlook for next year, the firm said: “It is not possible to forecast with any certainty how demand in the UK market will evolve during and after Brexit; the possible outcomes range from a rapid increase in demand, through to a gradual decline and where they will actually fall is unknowable, but we are inclined to believe that the risk to our business is weighted slightly to the upside.”