Serco resumes dividend payments; plays down impact of test & trace windfall


Serco Group PLC (LON:SRP) pleased the market with full-year results that included the resumption of dividend payments.

The controversial outsourcing company, heavily criticised for its handling of the UK’s Test & Trace coronavirus programme, last paid a dividend to shareholders in 2014 but on the back of a strong increase in revenues and profits in 2020, it has recommended the payment of a final dividend of 1.4p.

Revenue in 2020 rose to GBP3,885mln from GBP3,248.4mln in 2019. On a like-for-like or organic basis, revenue was up 16% year-on-year.

The group has upgraded revenue guidance for the current year to around GBP4.2bn from the previous guidance of around GBP4.1bn.

Profit before tax shot up to GBP153.3mln from GBP80.7mln the previous year. Profit guidance for 2021 has been increased by 6%, with the group looking for a 10% year-on-year increase on a constant currency basis, excluding the effect of the acquisition of WBB.

“After the dramatic growth of the last three years – with 33% compound annual growth in underlying trading profit – we see 2021 as being a year of more normal rates of growth in revenues and profits; we will have some ‘drags’ on our profitability, notably only having six months of the AWE contract, and we expect revenues related to Covid-19 services to be much stronger in the first half than in the second; however, we have had a strong start to the year, and we are therefore increasing our profit guidance for 2021, with the revised guidance equating to 10% constant currency growth in the year,” said Rupert Soames, the chief executive of Serco.

Broker Peel Hunt said the numbers were in line with expectations, with underlying profit before tax of GBP137.3mln just GBP1.1mln above the median forecast of analysts who follow the stock.

The broker responded by bumping up its current year forecasts by GBP10mln to GBP155.6mln,

Peel Hunt is expecting analysts to upgrade their forecasts and noted that on current (unrevised) forecasts, the shares trade on a multiple of 15 times projected earnings per share (EPS) for this year and 13.9 times 2022 EPS, whereas the two-year average earnings multiple prior to the coronavirus outbreak was 21.2.

“The decline is unwarranted given the resilience of operations throughout Covid, the achievable medium-term targets and strong finances which could provide upside in the form of further selective acquisitions or share buybacks,” the broker said.

The broker rates the shares a ‘buy’ with a target price of 162p.

Shares in Serco currently trade at 135.5p, up 4.9% on the day.


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