Investment View: Serco's super growth makes it worth the risk



Our view: Buy

Price: 544.5p (+0.5p)

Credit Serco with this: it runs one part of London's publictransport system that actually works. Perhaps that's because the trains on the Docklands Light Railway don't feel the need for a bonus on Boxing Day: They don't have drivers.

In the meantime, the company yesterday told investors that everything remains on track. Serco has sold out of a couple of operations – one providing education software and the other data hosting – for £6m. So the sales will generate a £25m loss.

That's not too clever. Handy that the news could be slotted into a pre-close update in the last full trading week before Christmas. Perhaps that's being cynical, though, because the generally positive tone sent the shares higher.

It is also worth noting that gains on disposals earlier in the year will cancel out the loss and a £5m donation to a new charitable foundation (bless 'em, full of Christmas spirit) announced yesterday.

So the forecast £270m of pre-tax profits for 2012 won't be significantly impacted by one-off charges.

On the face of it, Serco should be finding the going rather difficult. More than £9 out of every £10 it generates in revenue derives from governments, and while it has been branching out into the private sector, the public sector will still be its mainstay for some time to come.

Fortunately, its operations are global. And, what's more, some embattled governments with big deficits (like ours) have been outsourcing an increasing number of services.

That helps to explain why the group won £4.2bn of orders in the first half, against £2.5bn in the previous year. At the half year the company boasted a £19.4bn order book, with a further pipeline of £31bn of "identified opportunities" worldwide.

The group has since won £1.4bn of contracts, bringing its year-to-date total to more than £5.6bn.

It is worthy of note that when The Independent looked at this company this time last year its order book stood at £16.6bn. That's some growth.

Serco appears to be winning in the current tough climate, although it hasn't all been plain sailing. The US, in particular, has proved tough, although Serco is hardly alone in being a British company that has struggled stateside. However, it has won a $70m (£43m) contract to upgrade military vehicles, while the company's US Army career-transition services contract and its patent-office classification contract have seen expansions worth around $100m combined.

If there is a downside to Serco it isn't so much in the company's ability to win new work, it is in the potential for some of the jobs it has won to blow up in its face. When government contracts go bad, the negative publicity can be brutal.

While ministers and civil servants who muck up contract negotiations tend to be first in line, companies holding badly negotiated state contracts which don't work well for the end user can suffer too and damage outsourcing's reputation generally.

Providing a sprawling range of services across a huge range of sectors, Serco executives need to be on the ball to ensure all is well at a time when it is growing very quickly.

If they needed an example of what can go wrong, they might like to pop over to G4S for a sit-down with Nick Buckles about the disastrous Olympic security contract – remember that?

G4S has still to recover from the reputational damage, and even through its shares look cheap (10.3 times next year's forecasts with a prospective yield of 3.7 per cent) I'd steer clear until it has proved it is clear of the fallout.

For its part, Serco has the £175m Compass asylum-seeker support services contract which has started full operations. Imagine the Daily Mail's glee if something goes awry with that one.

That said, Serco is probably worth the risk. If it proves able to effectively manage the new business it is putting on at a rate of knots investors will be well rewarded.

The shares are hardly expensive by historic standards. They trade on 12.3 times 2013 forecast earnings, with a forecast yield of 1.8 per cent, which is acceptable enough given the rate at which the company is growing. Serco's shares have been drifting downwards in recent weeks. I'd take that as a buying opportunity.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
Life and Style
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions