Bad news may come in threes but sometimes good news can arrive as a pair. Outsourcer Serco’s joint venture with France’s Engie announced it had won a UK defence contract worth at least £900m on Monday. A further extension of UK government lockdown measures is also expected to boost revenues from Serco’s much-debated UK pandemic test and trace contract. Expectations of an extra £15m of profit this year sent London-listed shares up 5 per cent.
Serco is part of a group of outsourcers that fell foul of previous UK government efforts to cut costs. The process incentivised underbidding on contracts that led to poor delivery of services and steep losses for contractors. That tumultuous period ended with the pandemic, replaced by greater public-private co-operation. Serco shares at 140p offer an opportunity to take advantage of the shift.
Under chief executive Rupert Soames, Serco has managed to draw a line under past problems. Mistakes are all but paid for. The remnants of the bill racked up by Soames’ predecessors was estimated at £400m when he took over in 2014. Cash outflows from lossmaking contracts withered to just £2m last year. Revenues of £3.9bn were the highest since 2013. Of this, UK track and trace contributed about £350m, thinks UBS.
Public criticism of the test and trace programme has weighed on the share price but has not prevented Serco from lifting profits. Underlying trading profit (ebita) this year is now expected to be £200m, or about 8 per cent more than analysts previously expected. That leaves shares trading on 14 times expected earnings for 2021. These have essentially moved sideways since a large rights issue in 2015 to reduce debts.
Bloated public borrowing means governments still want to do more with less. Similar conditions after the financial crisis led to a boom for outsourcers, albeit one that ended in disaster for most of them. If Serco can prove its test and trace services are effective, it could avoid a repeat performance.
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