Serco able to offset delays in US deal awards

The outsourcer grew revenues 4.3 per cent to £2.3bn in the first six months of the year. But adjusted pre-tax profits fell 17.4 per cent to £102.1m

The FTSE 100-listed group competes with firms including G4S, Interserve, Capita and Sodexho to run services for local authorities, central governments and businesses.

It said conditions in the UK are starting to improve and its Middle Eastern and Australasian businesses are booming, but presidential elections have choked spending plans in the United States. Reorganisation costs of £12m also hit earnings.

The group now makes 46 per cent of its earnings overseas, compared with 42 per cent a year earlier.

Serco won contracts totalling £4.2m during the first six months, and said its order book – the value of future revenues based on all existing signed contracts – had grown to £19.4bn by the end of June, from £17.9bn at the end of 2011.

“We are now seeing bids come out in prisons, probation, a little bit with the police back office, community service schemes.

“We have seen some bids in defence. So, they are all starting,” said chief executive Christopher Hyman.

“Some of it might come through in a small wave this year but I think it will more influence 2013 and 2014.”

Serco has a range of contracts across Yorkshire, including running HMP Doncaster and its Young Offenders Institution, helping the unemployed in South Yorkshire back to work, and working with West Yorkshire Police providing non-emergency medical and forensic services to police custody suites.

Together with Abellio, it also owns half of Northern Rail, the local train service which spans the Pennines. It recently won an extension to the franchise until 2014 and plans to start a full re-bid next year.

Earlier this year it won a £55m, 10-year contract to run shopping giant Freemans Grattan Holdings’ Sheffield call centre.

But its 10-year £360m contract to run education services in Bradford ended in 2011, and Serco said together with cuts to regional development agencies, this weighed on its business process outsourcing division.

Serco estimates it has a total pipeline worth £31bn. Notable contract wins included a deal to run ferry services to Scotland’s Northern Isles and to support the UK asylum service, worth £175m over five years.

The group’s UK and European arm saw revenues slip one per cent to £1.27bn, but margins increased to 6.8 per cent from 6.3 per cent.

Its “payment by results” deal at HMP Doncaster is “beginning to show that it has real potential to reduce re-offending”, said the group.

Ten per cent of its annual revenue from the prison is dependent on it cutting re-offending by five percentage points.

It is also bidding to add to its six UK prisons as more come up for tender.

Serco said the UK shows “signs of increasing activity and good growth activity” as the public service looks to cut costs.

“Competitive outsourcing supports the government’s aim of achieving savings while improving services and social outcomes,” it said.

“The reform of public services provision will be an ongoing process, but the Cabinet Office and spending departments appear increasingly focussed on picking up the pace of bringing opportunities to market.”

Serco’s Americas arm, which covers the US and Canada, saw revenues fall 16 per cent to £381m. Margins slid to 7.8 per cent from 8.3 per cent.

Debt concerns, the looming election and budget uncertainty weighed on earnings in the US and Serco warned its federal contracting market is likely to continue shrinking.