September 28, 2018 / 6:19 AM / in 25 days

Surprise profit boost lifts shares in Serco

(Reuters) - Outsourcing company Serco (SRP.L) expects profits this year to jump a better-than-expected 30-40 percent thanks to improved trading and tighter cost control, it said on Friday, sending its battered shares up as much as 15 percent.

FILE PHOTO: Rupert Soames, CEO of Serco Group Plc poses for a photograph at their offices in London, Britain, July 3, 2018. REUTERS/Simon Dawson/File Photo

Serco provides public services ranging from running prisons and providing border security to operating ferries and trains, and managing healthcare services from payslips to cleaning.

In recent years it has turned its focus abroad and cut costs to compensate for slower public outsourcing in Britain, which accounts for around 40 percent of its revenues.

Chief Executive Rupert Soames described Britain as being “in thrall to Brexit,” in a telephone interview with Reuters.

The surprise announcement marked a welcome boost for Serco, which has been hit by the knock-on effect of the collapse of rival Carillion at the start of the year and major difficulties at peers Capita (CPI.L) and Mitie (MTO.L).

Asked whether any of the factors affecting its performance were explained by an improving business climate, Soames said: “I would say this (improvement) is pretty much all home-grown. This is about us executing on our plan and it going a little faster than we thought it would.”

Serco’s shares were up 13.5 percent to 101.4 pence at 0820 GMT. Prior to Friday, the stock had fallen 10 percent this year, underperformed its FTSE Mid-250 .FTMX index, which has fallen 2 percent.

Analysts at broker UBS said the upgrade could imply an up to 5 percent increase for next year’s forecasts too.

“We believe the recovery is underway,” they said.

Soames said the business backdrop for outsourcing in the United States and Australia was “pretty upbeat”, the Middle East was difficult to read because of geo-political uncertainty while the UK was “in thrall to Brexit.”

Soames is a grandson of British wartime prime minister Winston Churchill and closely-connected to political circles.

Asked about his expectation of whether Britain will reach a deal to leave the European Union and what kind of deal that might be, he replied: “God knows.”

Serco now expects underlying trading profit of 90-95 million pounds, well above the 69.8 million pounds it reported last year.

It also sees revenue beating market expectations at about 2.8 billion pounds. Previously it had forecast revenue of 2.7-2.8 billion pounds and profit of about 80 million pounds.

Full-year results would be boosted by a number of non-recurring trading items, such as end-of-contract settlements.

Net debt is expected to be at the lower end of its previous guidance of 200-250 million pounds, helped by early repayment of a vendor loan note issued on its disposal of Intelenet in 2015.

Previously, net debt was forecast in the top half of the range.

Reporting by Arathy S Nair in Bengaluru; Editing by David Goodman and Mark Potter

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