Serco Group (LSE: SRP) shares moved 11% higher on Thursday 29 June after the outsourcing company increased its guidance following a strong H1. At 158p, the FTSE 250 stock is up 16% in the last week.
In raising both its annual revenue and profit guidance, the firm highlighted strong demand for immigration services, both in the UK and Europe. It’s also benefiting from international growth in its defence segment.
These would appear to be long-term growth markets for Serco, which has a strong competitive position after operating for decades in many of its markets. Plus, the shares are still relatively inexpensive.
On paper then, this would seem to represent a buying opportunity. But is it?
Strong H1
For the first six months of 2023, the group anticipates revenue increasing 13% year on year to £2.5bn. This includes organic revenue growth of around 6%, with acquisitions contributing 5% and favourable currency movements adding 2%.
It expects underlying trading profit to increase by 8% to at least £140m. This is impressive considering the firm lost its Covid-related work in the first half of last year.
New chief executive Mark Irwin commented: “Governments around the world are increasingly looking to us to help them with the complex and difficult challenges they face and…this is driving growth in a number of areas of our international business and enables us to upgrade our guidance for the year.”
As a result, Serco now expects full-year revenue of £4.8bn, up from its previous expectations of £4.5bn. Meanwhile, annual profit is forecast to be around £245m, which is only 3% higher but still a 4% upgrade to its previous guidance.
Growing immigration market
Serco is an incredibly well-diversified business, operating across the world in defence, transport, justice, immigration, health, and other citizen services for local and national governments.
Its immigration services includes the management of detention centres, providing housing and welfare support for asylum seekers, as well as issuing identity documents. The company is seeing “robust demand” in this sector in the UK, and it expects this to continue.
In September, Serco acquired a business called ORS in order to enter the European immigration services market. This is a fast-growing market, as last year saw the highest number of migrants entering the European Union since 2015. Trading in this asylum and immigration processing business has been “ahead of expectations with robust underlying demand due to global migration patterns.”
Would I buy?
The stock is cheap, trading on a pre-upgrade price-to-earnings (P/E) ratio of 10.5. Plus, there’s a dividend yielding around 2% that’s covered four times over by earnings. This suggests there’s ample scope to increase the payout moving forward.
One concern I’d highlight is that the company has been involved in a number of scandals in previous years. For example, it overcharged the government for the electronic tagging of offenders. Indeed, it was barred from winning new government contracts for a while.
However, previous chief executive Rupert Soames, who was in charge from 2014 to the beginning of this year, led a successful turnaround. The company seems in much better shape today than it has done for years.
On balance, I think the shares represent good value and I’d probably snap some up if I had money to invest.
