Serco profits upgrade triggers breakout

Finally! Serco has published good news, with promising contract progress and deferred costs forcing a profits upgrade for 2016. A wave of buyers triggered a chart breakout, sending shares in the British outsourcer through the crucial 100p level to a two-month high. But with many benefits flagged as one-offs, the company may call on newly-established technical support quite soon.

Marking up its full-year forecasts, the government contractor reckons revenue will now reach £2.9 billion this year, with underlying trading profit of "at least" £65 million. Previously, management pencilled in £2.8 billion of sales and £50 million profit. That's a mouth-watering 30% upgrade.

There's good news on contracts in the first half. The Virginia transport and US Army transition assistance agreements have been extended beyond the end of the year and a number of its operations are doing better than expected. Even the contracts Serco has been forced to exit have better settlement charges than budgeted for, including Northern Rail.

Cost-wise, some of the outgoings pencilled in for the first six months of the year have been deferred and the group's plan to offset losses and lower costs related to its UK onshore private sector Business Process Outsourcing operations is ahead of schedule. The bottom line will be sweetened by foreign exchange benefits, too.

Rallying as much as 13% Wednesday, Serco's shares have done what looked highly unlikely yesterday: the shares have broken through the bearish trendline established a year ago during which time Serco had lost half its market value.

Before today's surprise update, Serco looked more likely to close the gap-up created at the end of February and test 2016 lows. This is great news for investors, but it's worth remembering these are one-off influences and 2017 forecasts are untouched.

There's still a lot of work to do with the business, and chief executive Rupert Soames must go into more detail in August's interim results.

"It is encouraging that we are able to announce an upgrade to our guidance for the year, albeit that much of this improvement comes from items that will not recur," said Soames Wednesday.

"We must remain cognisant that, with underlying margins currently around 2%, our profits are a sliver of reward between two very large numbers - revenue and costs - tiny percentage movements in which can lead to large percentage movements in profits.

"There remains much to do in order to complete our transformation this year and next, but we are continuing to make good progress on the roadmap we have set out through to 2020."

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