Brighter Serco prospects boost shares as plans bear fruit

By Elisabeth O'Leary

EDINBURGH (Reuters) - Serco (SRP.L) expects revenue to start to grow for the first time in six years in 2019 as it finally starts to reap the rewards of an overhaul but the British outsourcer asked investors to be patient on the restoration of dividend payments.

The services provider predicted positive free cash flow in 2018 after three years of outflows, sending its shares up as much as 10 percent. Earnings per share forecasts were raised thanks to a lower effective tax rate, it said.

Some analysts now see Serco as a bright spot in a struggling sector and hope the company will be able next year to reinstate a dividend suspended in 2014.

The problems of Britain's outsourcers are illustrated by January's collapse of Carillion and with Interserve (IRV.L) needing to rebuild its balance sheet.

Serco has focused on winning business abroad and cutting costs, allowing it to weather the storm in outsourcing. The UK now provides two fifths of its revenues versus around 55 percent back in 2014.

The group operates prisons and houses asylum seekers, provides public health sector administration, as well as running trains and ferries and providing IT support to the US Navy.

When asked about the dividend being reinstated, Chief Executive Rupert Soames had a one word answer -- "Patience!"

"Clearly when cash flow turns positive that's a good sign but it's only going to be modestly positive. We are working through quite a burden of onerous contract provisions."

Shares were trading up 8.7 percent at 97.2 pence by 0940 GMT.

BREXIT BURDEN

The uncertainty surrounding Britain's exit from the European Union was hurting the business climate, Soames said in a telephone interview. But the basic services which Serco provides means that it is insulated to some extent.

"I think being a mere hewer of wood and drawer of water and doing front line services is positively advantageous at the moment," added Soames, a grandson of British wartime prime minister Winston Churchill.

"Clearly at the moment the uncertainty (over Brexit) is having an effect which is bad and getting worse ... until there is a resolution about the shape of Brexit I think it's going to be very difficult for investment in the UK economy."

Serco expects underlying trading profit to grow 30 to 40 percent to 90 million to 95 million pounds ($120 million) in 2018, in line with analysts' forecasts, and to 95 million to 100 million pounds in 2019.

Revenue is seen rising modestly to between 2.8 billion and 2.9 billion pounds, from 2.8 billion pounds in 2018.

(Additional reporting by Shashwat Awasthi in Bengaluru; Editing by Susan Fenton/Keith Weir)