Serco shares jump on trading update and upgraded cash flow guidance

Investig.com -- Shares of Serco (LON:SRP ) jumped more than 8% on Thursday following the defense contractor’s trading update, which largely met expectations and offered a more optimistic outlook for the upcoming year. 

While the company reiterated its guidance for FY24 earnings before interest, taxes, and amortization, it raised its free cash flow forecast by £20 million, now expected to reach £170 million, surpassing previous guidance of £150 million. 

Additionally, analysts believe the comments on surplus capital point to the possibility of further share buybacks next year, providing additional support for the stock.

For FY24, Serco maintained its organic revenue guidance at a decline of 3%, which is broadly in line with market consensus. 

The company is on track to generate approximately £4.8 billion in revenues, with EBITA forecast to come in at £270 million, matching consensus expectations. 

Free cash flow was notably upgraded, now expected to be £170 million, up from £150 million previously, and net debt is expected to improve to £145 million, better than the consensus estimate of £169 million.

Looking ahead to FY25, Serco provided its first guidance for the year, forecasting flat organic growth despite a significant headwind from the loss of immigration contracts, which is expected to weigh on revenues by around 7%. 

The company, however, expects this decline to be offset by strength in its North American business. 

Analysts at Jefferies pointed out that the company’s EBITA forecast for FY25, at £260 million, was about 3% higher than consensus, despite the immigration contract loss and a £20 million impact from the UK National Insurance changes announced in November.

This marks a positive, as the company projects EBITA margins to be around 5.4%, slightly ahead of consensus expectations of 5.3%.

However, the news wasn’t all positive. Serco's net interest guidance for FY25, which is expected to be around £42 million, came in above market expectations of £36 million, largely due to higher lease charges. 

This increase in interest expenses is expected to offset the EBITA beat, meaning analysts do not anticipate major upgrades to consensus estimates in the near term.

Despite this, Serco's share price has been under pressure recently, falling more than 20% since November due to lowered expectations. 

Source: Investing.com