Serco Group Plc Will Acquire Defence Business Unit For $225 Million

Serco Group Plc (SRP) is a provider of business process outsourcing services. The company offers welfare and business operational support, environmental and leisure, professional, technology and management services, defence, transport, justice and immigration, citizen services and direct services such as facilities management. The company has differentiated its operations in five operating segments: UK & Europe, Americas, Asia Pacific, Middle East, and Corporate.

Financial Highlights (FY2018, £ million)

(Source: Annual Report, Company Website)

The company’s reported revenue declined by 4 per cent to £2,836.8 million as compared with the financial year 2017 data of £2,950.9 million, due to the impact of the currency. The reported underlying trading profit increased by 34 per cent to £93.1 million against the £69.3 million in 2017, and on a constant currency basis by 40 per cent.

Reported operating profit (after exceptional items) stood at £80.5 million, an increase of 282 per cent as compared to the last year data. Underlying diluted earnings per share surged by 55 per cent (reported currency) to 5.21 pence from 3.36 pence in FY17.

Reported diluted earnings per share stood at 5.99 pence. Net debt climbed by £46.9 million to £188 million against the previous year data and the positive free cash flow was £25 million. The company’s order book surged from £10.7 billion in FY17 to £12 billion in FY18.

The company will acquire the US defence business from “Alion Science and Technology Corp.” for a total consideration of $225 million. The deal will be completed by the end of H2 FY2019.

The group’s Chief Executive Rupert Soames stated that the new deal will further enhance scalability and capability of the US defence business segment. In North America, the company employed around 6,000 workforces, out of which 2,300 employees work mainly in the defence and provide important services to the US Navy from last 30 years.

The acquisition will be funded through a new debt facility of around £75 mn and a share placement to raise additional £130 mn.

Share Price Performance

Daily Chart as at May-24-19, after the market closed (Source: Thomson Reuters)

On May 24, 2019, SRP shares closed at GBX 130, down by 0.077 per cent against the previous day closing price. Stock’s 52 weeks High and Low is GBX 138.30/GBX 83.50. The average traded volume for 5 days was up by 68.91 per cent as compared to the 30 days average traded volume. The outstanding market capitalisation was around £1.45 billion.

On the valuation front, the stock was trading at a trailing twelve months PE multiple of 24.1x as compared to the industry median of 12.4x. The company’s stock beta was 1.39, reflecting higher volatility as compared to the benchmark index.