Resurgent government outsourcer Serco (SRP) pleased the market on Wednesday with a strong set of full year results and the reinstatement of the dividend for the first time since 2014.

The shares, which have outperformed the market over the last year, added another 0.8% to 152p while the FTSE continued to struggle with coronavirus fears knocking consumer stocks lower.

POSITIVE PROGRESS

For the year to 31 December group revenues rose by 15% to £3.25bn, marking the first year of top-line growth since 2013, while trading profit rose by 29% to £120.2m marking a second successive year of growth.

Importantly, more than half of the increase in revenues was due to organic growth which excludes acquisitions.

As chief executive Rupert Soames put it, Serco has ‘finally achieved escape velocity, leaving behind the gravitational pull of past mis-steps.’

Thanks to a significant increase in free cash flow, from £16.3m in 2018 to £62m last year, the board recommended paying a nominal 1p per share dividend, the first pay-out in over five years.

Also notable is the large order book which stood at £14.1bn at the end of December, equivalent to more than four times last year’s turnover, thanks to record new orders of £5.4bn during the period.

IMPROVED VISIBILITY

In the past, firms like Serco had little visibility regarding profits on government contracts because they often contained clauses which made the companies rather than the government liable for cost over-runs.

As a result the outsourcers had to take ‘onerous contract provisions’ (OCPs) every year. At the end of 2014 Serco estimated that the total value of its OCPs was £447m, almost all of which has now been worked off with just £17m of liabilities remaining.

With healthy revenue growth pencilled in for this year and next year, and potential for operating margins to expand further, shareholders can look forward to more dividend payments in future.

READ MORE ABOUT SERCO HERE

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Issue Date: 26 Feb 2020