Serco reassures on profits as margins lower but sales higher - UPDATE

28th Jun 2013 07:01

Public services outsourcing group Serco has said that slightly lower profit margins and higher revenues will mean that full-year profits remain in line with expectations.The FTSE 100 company revealed that it is likely to report strong organic revenue growth ahead of expectations for the first half of 2013 thanks to the bumper level of contract wins the year before. Serco's acquisitions and disposals completed last year have largely balanced each other out in terms of revenue growth.Excited by the potential demand for its services around the world, group has invested in more contract bidding and new market development activity. This has resulted in a "small reduction" in the adjusted operating margin for the group as a whole from the previous level of 5.9%.Consequently, the net effect of stronger revenue growth and the reduction in margin should produce an adjusted operating profit for the half-year that is in line with management's original expectations.Reassuring that, despite the increased internal investment, cash generation was also reported to be "broadly similar" to the prior year, management added that they "remain confident in the ongoing resilience, overall outlook and future growth prospects for the group".Broker Investec said: "Our concerns on margins seem to have played out in the first half; although revenue momentum is clearly positive, it has been supported by a record year of contract wins in 2012, relative to a more subdued period of contract news flow in FY13 to date. "With cash generation restrained by bidding investment and re-bid risk still manifest, we remain cautious for now."Analyst Gideon Adler expressed caution about the second half and suggested that with Serco having previously reported £0.9bn of contract awards in Q1 compared to £3.9bn in the comparative period, there are manifest headwinds to further momentum.Shares in Serco were up 3.75% at 623p at 12:30 on Friday.OH