Serco relishing public sector cuts

To some firms government cuts spell disaster as austerity drives slash services that are deemed unnecessary or too expensive, but if you're in the business of supplying something for less than it currently costs, then these cuts can mean a bonanza.

This is very much the case for Serco.

Its management could be forgiven for whistling Monty Python's 'Always Look on the Bright Side of Life' as governments take their proverbial scythes to public sector balance sheets.

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The company is hoping to take advantage of billions of pounds of global opportunities as services are outsourced.

In the cash-strapped UK it is seeing "stabilisation and increasing signs of improvement", with "further indications of new markets opening up, supported by the agenda for public service reform".

The opportunities being eyed by the firm include those driven by the growth in commissioning of health services, defence organisation strategic partnerships and competition being introduced to numerous areas of the home affairs market.

Near-term opportunities include the outcome of the current round of prison bids, which could throw it into a scrap with G4S, which is very much a scapegoat at the moment after its Olympic failings.

Serco is currently bidding to add further prisons to the six it currently runs in England and Scotland, and predicts further public sector prisons are likely to come to market.

In England and Wales, there are currently 133 prisons with the private sector operating 14 of these.

That's not to say Serco has had it all its own way through recent economic gloom.

The outsourcing group was hit by tough markets and reorganising costs in the first half, but said it expected a strong showing in the second.

Revenue was up 4.3% to £2.3bn, with adjusted pre-tax profit down 17.4% to £102.1m.

Organic revenue, which strips out acquisitions and currency effects, dropped by 2.1%.

Ignoring reorganisation costs, profits were down 4.7% to £117.8m, with the company citing challenging US market conditions.

However, the firm pushed its dividend up 6% to 2.65p, in line with underlying earnings.

Conditions remained very difficult and uncertain for the US federal outsourcing market as revenues dropped 16%, it said.

But revenue growth in AMEAA - where sales were up 22% - and areas of improvement in the UK provided balance, it added, despite UK revenues falling 1%.

Serco said it expected to deliver a year of good organic revenue growth for the group overall in 2012, with first half decline of 2% set to improve off the back of strong second half growth driven by previously announced contract wins.

In the first half of 2012 the firm signed contracts valued at £3.7bn and was appointed preferred bidder for a further £0.5bn.

The total £4.2bn of awards compares with £2.5bn in the equivalent period in 2011.

In total, Serco's order book grew to to £19.4bn in the first half.

"Our business in Australasia and the Middle East continues to grow strongly and, while significant challenges in the US remain, we see conditions in the UK starting to improve," said Chief Executive Ryan Hyman.

"The recent level of new contract wins across the group will help us deliver the anticipated strong financial performance in the second half of the year."