Serco rallies on signs it can withstand bumpy UK outsourcing road

By Elisabeth O'Leary

EDINBURGH (Reuters) - Britain's Serco (SRP.L) said it expected to emerge as one of the winners from the turmoil hitting the outsourcing sector after it reported 2017 results in line with its expectations and predicted profit growth for the next two years.

Serco, which provides justice, transport, defence and welfare services for governments across the world, is in the latter stages of a five-year restructuring, started after it ran into the kind of problems which led to the demise of rival Carillion (CLLN.L) in January.

Serco shares rose 5 percent in a falling market after Chief Executive Rupert Soames said the actions it has taken made it more robust than rivals who are also grappling with a downturn in demand, such as Capita (CPI.L) and Interserve (IRV.L).

"We understand that (Serco) getting to this point has been a long haul for investors, and that there is still a long, and probably bumpy, road ahead before we are producing acceptable returns. But we are now moving forward, not backward," Chief Executive Rupert Soames said in a statement.

Shares were up 5 percent to 95.15 pence at 0922 GMT, while the FTSE (.FTSE) 100 blue chip share index was down 1 percent.

"This environment may produce opportunities for suppliers with strong track records of delivery," Soames said. "We've got the capacity to take on more work if we get the opportunity."

Soames, a grandson of British wartime Prime Minister Winston Churchill and well-connected to political circles, said government and businesses must learn from the Carillion crisis.

Much of Britain's public services, from running trains and paying dentists to maintaining nuclear warheads and operating prisons, are run by private companies who rely on government contracts for much of their income.

But because of a decision-making slowdown due to Britain's impending exit from the EU, some operations have been revealed as unsustainable and the contracting system flawed.

"We and other companies are just saying 'no' to the transfer of unmanageable state risk to companies. For example, transferring to a company a 10-year change-of-law risk when we are about to go through Brexit," he said.

Serco reported revenue down 2 percent to 2.95 billion pounds ($4.09 billion) in 2017 while underlying trading profit fell to 69.8 million pounds, at the top end of guidance.

Revenues have been falling for several years now as Serco concentrates on cutting costs to double its profitability margin to 5 percent from current levels.

(Reporting by Elisabeth O'Leary; editing by Kate Holton and Adrian Croft)