Serco Jumps as Turnaround Leads to Boost in Profit-Target

  • Underlying trading profit seen at at least 80 million pounds
  • Currency to help earnings after Brexit vote led to pound drop

Serco Group Plc shares surged to a 14-month high after the U.K. government-services contractor raised its profit target for a second time this year following quicker-than-expected cost savings and the pound’s plunge.

Serco rose as much as 16 percent to 138 pence, the highest intraday price since June 3, 2015, and was up 14 percent at 12:18 p.m. in London. Underlying trading profit will be “not less than” 80 million pounds ($106 million) in 2016, the company said Thursday in a statement. The forecast compares with predictions of 65 million pounds in May and 50 million pounds in February.

“Serco has had a bit of following wind this first half,” Chief Executive Officer Rupert Soames said in a phone interview. “I hope that people will see these as a pleasing result, but a little ray of sunshine on what is going to be a long, hard and bumpy road.”

Soames has led a restructuring of the company, which counts the U.K.’s Defence and Justice Departments as two of its biggest customers, after scandals including overcharging on a contract for electronic tagging of criminals damaged its relationship with the government. Serco’s stake in a group that builds the U.K.’s nuclear warheads, a temporary transport-contract extension in the U.S. and a better-than-expected resolution to its Northern Rail route franchise in the U.K. helped lift profit in the first half.

First-half underlying trading profit rose 8.7 percent from a year earlier to 51 million pounds, Serco said. Cost reductions in the past year have amounted to about 550 million pounds, Soames said. Full-year earnings are likely to be boosted by 8 million pounds to 9 million pounds after Britain’s referendum in June to exit the European Union pushed the pound to its lowest value in three decades.

About three quarters of Serco’s order pipeline comes from outside the U.K., “at a time when everybody’s agog with Brexit” and how the government will respond, positioning the company to capitalize on new foreign markets, Soames said. Serco is also looking at opportunities within Britain as immigration controls are tightened and regulations are rewritten in light of the U.K.’s exit from the 28-nation bloc.

“I’ve been through the five stages of grief” following the Brexit vote, Soames said. “We’re now right at the other end, focusing on the snuggling up to the opportunities.”

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