Serco FY pre-tax profit up, trading profit down

FTSE 250 outsourcer Serco reported a drop in trading profit for the year to the end of December as revenue declined, but it swung to a pre-tax profit and reiterated its guidance for 2017.

Underlying trading profit fell to £82.1m from £95.9m, with discontinued operations – the exit of its private sector business process outsourcing operations – reducing profits by £19m.

The company swung to a pre-tax profit of £29.6m from a loss of £69.4m in 2015.

Reported revenue from continuing operations slipped to £3.01bn from £3.18bn the year before. Revenue including discontinued operations fell 13% to £3.05bn, comprising 11% an organic decline from net contract attrition and an 8% reduction from disposals, partially offset by a 6% currency benefit.

Order intake in the period was up 40%, with £2.5bn total value of signed contracts and the pipeline of larger new bid opportunities ended the year at £8.4bn, up 30% on the year.

Serco said guidance for 2017 is unchanged and at current foreign exchange rates, it expects revenue of around £3.1bn and underlying trading profit of between £65m and £70m.

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 at the start of the year, although this was in large part due to the resolution of a number of commercial matters in the first half, which will not recur; trading in the second half was in line with the guidance we gave at the time of our half-year results.

"Operationally, we have had a busy year: across key contracts our service delivery has improved; we have reduced operating costs by some £450m whilst improving employee engagement; at year-end, the value of our pipeline of new opportunities was up 30%, notwithstanding a 40% increase in order intake; and we have cleanly exited the private sector BPO business. These are the first fruits of the ‘transformation’ phase of our plan, which we are now about half-way through.”

Liberum downgraded Serco to ‘sell’ from ‘hold’ following the results, which it said were a little weaker than it expected, and trimmed the price target to 120p from 135p. The brokerage said the recovery was "taking a little longer".

RBC Capital Markets, which rates the stock at 'underperform', said: "Results are broadly in line with expectations and the group has maintained its guidance for FY17. However, the results are still messy with another £71m of one-offs and the outlook is a reminder that 2017 will be a tough year and given 40% of the business is up for rebid through to 2019, there remain many uncertainties.

"We are unlikely to move operational forecasts today, although earnings per share will come down for the higher tax rate (50% vs 45% forecast). We continue to struggle with the valuation, with a seemingly significant upturn in trading already being discounted."

At 1125 GMT, the shares were down 14% to 126.90p.