Investment: Serco surge in world of plenty

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The Independent Online
WHAT DO London's Docklands Light Railway, the Young Offenders' Institute in Pucklechurch and Adelaide airport have in common? The answer is that Serco is involved with all of them. The services group, which has successfully ridden the outsourcing boom, yesterday issued its latest set of impressive results, reporting pre-tax profits up 20 per cent to pounds 12.7m.

There are few signs of the boom ending. True, contracts are becoming more complex. Intricate joint ventures to build and operate NHS hospitals are a far cry from simple outsourcing deals. But Richard White, Serco's chief executive, says the government's new drive for public-private partnerships is providing it with plenty of new projects. They include London Underground and the Defence Evaluation Research Agency, both likely to be sold off in the next few years.

Expansion in Australia and the US, where Serco recently made an acquisition, is fuelling further growth. Its balance sheet, with net cash of pounds 11.5m at the half-year, is a constraint on growth. But Serco will raise cash by selling its share holdings in mature private finance projects. It recently raised pounds 4.5m by selling its stake in the RAF's Helicopter Flying School.

Serco shares closed up 35p at 1227.5p but are down 15 per cent from their peak. Still, they still trade on a multiple of 44 times expected full- year profits. That may look expensive in volatile markets. But Serco's solid earnings base and attractive growth prospects means the shares are worth holding.