Serco does our dirty work. It runs six British prisons and shuffles 24,000 prisoners a month between courts and jails. It mops up our hospitals and runs Yarl’s Wood and other immigration detention centres. Its binmen, meanwhile, hoist away the rubbish from 2.5 million British homes. And when Boris Johnson needed someone to stick a swab up our collective noses, of course it was Serco that won the Covid testing contract, pocketing £700 million from various types of pandemic-related work last year.
Now recession, we’re told, is looming — and straitened state coffers tend to trigger an outsourcing boom. Yet the market does not seem to have priced this in. The company, which, as ebullient chief executive Rupert Soames puts it, is “the pointy end of the government’s stick”, may be worth a second look.
It is now nine years since the FTSE 250-listed Serco became one of the most loathed firms in outsourcing (itself a generally despised sector) due to its £19 million blunder of charging the taxpayer for electronically tagging criminals who were actually dead. Yet its shares, trading today at £1.47, are still down 70 per cent on those pre-scandal peaks.
That’s despite Serco’s operational buoyancy. It won £5.5 billion of work last year, and so far in 2022 it has signed big new contracts including a £300 million deal to run the new Glen Parva prison in Leicestershire for a decade, as well as US defence work.
The City likes the margins that Serco is pocketing on new work, too. Its business pipeline stands at a mighty £9.9 billion, up 50 per cent on the same time last year and 70 per cent from last June’s £5.8 billion. Half its revenues are earned overseas.
Serco has already started to share its growing spoils with investors, paying a dividend again this year after doing so in 2021 for the first time in seven years.
Soames, one of the very few FTSE chief executives I trust enough that I once squeezed into a prison van with him (out of journalistic, rather than criminal, intent), has finally moved from helping Serco survive to feeling confident enough to launch a £90 million share buyback scheme.
And yet the stock’s valuation is soft, with shares changing hands at just ten times earnings for this year. Yes, Serco will face the same chilly winds as the rest of corporate Britain, including inflation and staff shortages; the outsourcer has already faced a strike over pay by hospital workers this year. But it will be able to pass on a chunk of those rising costs on to customers. The company looks set to flourish even as Britain’s economy wilts. Buy.
