Shares in outsourcer Serco (SRP) dropped 11% to 150p despite the firm posting ‘exceptionally strong’ results for the first half and maintaining its full year revenue and earnings targets.

It seems investors were disappointed with the board’s decision to prioritise repaying deferred taxes over paying the 2019 dividend and any interim dividend for this year.


Revenues for the six months to 30 June were £1.82 billion, an increase of 24% on the previous year due to 15% organic growth and a 9% uplift from the acquisition of the Naval Systems Business Unit of Alion.

The coronavirus had ‘little effect on profits’ according to chief executive Rupert Soames. ‘Although there have been some dramatic impacts, positive and negative, on individual contracts, in aggregate the “ups” on profits have balanced the “downs”.’

Thanks to an increase in margins from 3.4% to 4.3%, underlying trading profit jumped 53% to £78 million with organic growth topping 30% and NSBU adding 20%.

Also, much to Soames’ satisfaction, onerous contract provisions (OCPs) – that is provisions for losses on old contracts which were poorly structured – dropped from £42.1 million a year ago to just £1.7 million this year, meaning that the firm has almost completely eradicated the £447 million of OCPs identified when he took charge in 2014 and which were threatening to sink the firm.

There was more good news on orders, with new business reaching £1.9 billion or more than 100% of sales despite a number of tenders being delayed due to the pandemic. Roughly 60% of new orders were re-bids or extensions of existing contracts while 40% were completely new.


The firm repeated the financial guidance it issued in mid-June, namely revenues of £3.7 billion with 9% organic growth and underlying trading profits of £135 million to £150 million.

Free cash flow rose by £80 million thanks to tax payment deferrals of £49 million, and adjusted net debt fell by £58 million to just £143 million.

The firm said that subject to trading in the second half it would repay the deferred taxes towards the end of the year, which would put it ‘in a position to consider whether it should distribute all or part of what would have been paid as the final dividend in respect of 2019.’

On the same basis, the firm decided to defer a decision on whether it should pay any interim dividend in respect of 2020 until the fourth quarter, causing the shares to fall.


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Issue Date: 06 Aug 2020