Serco warns on UK and US markets despite profit rise

Serco Group (SRP) has announced a rise in revenue and profits for the first half of the year, despite "challenging conditions" in both its UK and US markets.

In the six months to the end of June, the outsourcing giant saw total revenue growth of 4.9% to £2,245.8 billion. This equates to a 5.4% rise excluding currency and 4.2% climb in organic terms.

Adjusted operating profit increased by 7.6% to £133.8 million, with adjusted pre-tax profit up 12.2% at £123.6 million.

Investors will enjoy a total dividend increased by 13.6% to 2.5p.

However, its shares were among the biggest fallers on the FTSE 100 on Wednesday morning, down over 5%.

Serco confirmed that almost half of the group's total revenue is now derived from outside the UK.

"Without doubt, our markets in the UK and US are facing challenging conditions. However, the breadth of our portfolio, our presence in fast-growing international markets, our significant new BPO capabilities, and the flexibility and innovation of our 100,000 people underpin our strong growth opportunities into the future," commented chief executive Christopher Hyman.

Serco said the group's free cash flow was £51.8 million compared with £93 million in 2010. It saw net capital expenditure increase by £28 million, reflecting a return to a more normal underlying level of capital investment, the anticipated investment in SAP systems in 2011 and one-off asset sales in the previous year.

The working capital outflow was also £14 million greater, reflecting a return to a more usual operating cash conversion rate.

Analyst view...

Mike Allen and Andy Brown, analysts at Panmure Gordon, commented: "While first-half results are some 4% ahead of our forecasts at the adjusted pre-tax profit level, we believe the market will be disappointed by the flat organic growth for second-half 2011E driven by difficult headwinds in the UK and US.

"We anticipate no change to headline consensus estimates as higher margins and the impact of previous acquisitions will take the organic growth shortfall. On the back of these results, we maintain a Hold recommendation with our preferences in the sub-sector lying clearly with Babcock (BAB) and G4S (GFS)."

Julian Cater and James Gilbert at Collins Stewart had a more positive view of the stock, reiterating their 'buy' stance with a target price of 720p.

"The modest level of organic sales growth in 2011 was anticipated. More significant are the broad number of opportunities, both in the UK and internationally, that the company is pursuing that gives us confidence that the company can achieve mid-teens EPS growth," they said in a note.

Caroline de La Soujeole at Seymour Pierce also has a ‘buy’ recommendation on the stock which remained unchanged after the results.

Meanwhile, Graham Brown at Evolution Securities remains 'neutral' on Serco.