Outsourcing helps Serco buck the trend

Courtesy: http://www.ft.com/

Serco will prosper in a deteriorating economy through increased outsourcing of essential services, Christopher Hyman, chief executive, said as it reported an 18 per cent increase in profits for 2008.

The group, which runs London's Docklands Light Railway and the UK Atomic Weapons Establishment, saw revenue rise 11 per cent from £2.8bn to £3.1bn.

Near-20 per cent growth in Serco's civil government and defence businesses drove the rise in pre-tax profits from £114.6m to £136.1m. Earnings per share advanced from 16.98p to 20.49p. The total dividend rises to 5p (4.25p) via a 3.52p final.

The difficulties faced by the wider economy were not necessarily a disadvantage for Serco, Mr Hyman said.

The "flexible new deal" - a government programme to assist the long-term unemployed back into the labour market - would be a key area of outsourcing opportunity, he said.

Serco's prison and immigration businesses could also benefit from the political and economic climate as prison populations rise with the crime rate and border security issues raise pressure on immigration services. "Crime goes up during recessions and if you can help with recidivism then you can make a real difference in difficult times," Mr Hyman said.

"These are the soft issues around a tough economy where I hope we are an agent of change."

Serco shares closed 16½p down at 387¼p. Michael Donnelly, an analyst at Teathers, said that may have been down to a slight decrease in the company's free cash flow - which that could be spent on acquisitions or buy-backs - and an increased appetite for risk among investors.

"People are taking the view that the market is cheap and Serco looks expensive, but it still absolutely deserves the premium," Mr Donnelly said.

"Listen to the rhetoric coming out of government and look at the size of deficit we're heading towards and you know the demand for efficiency gains is always going to be there."