Serco's latest results are deeply impressive.
Outsourcing giant Serco (LSE: SRP) is currently on the buy list of all the major UK brokers -- and while I don't normally pay much attention to these ever-changing recommendations, in this case I think they might be right.
Good financials
Serco's final results, which were published this morning, show that its revenues grew by 7.4% last year, including a 3.5% organic increase. Operating profit was up by 10.3% to £266.2m and adjusted earnings per share rose by 14.1% to 39.59p.
Free cash flow was down 9.4% on 2010 but remained solid at £168.3m, and Serco's adjusted operating profit margin rose by 0.26% to a healthy 6.2%.
Serco can see the future
One of the attractive aspects of Serco's business is its ability to secure revenues years in advance.
Serco currently has 92% revenue visibility for 2012, 80% for 2013 and 70% for 2014 -- and has £30bn of "identified opportunities" around the world.
In 2011 alone, Serco signed contracts worth £4.7bn. It says that it wins 50% of new bids and has a 90% win rate on rebids and extensions. I believe that this second figure highlights one of the strengths of Serco's business model -- once they are in place, it's hard to manage without them.
To give you a flavour of how important Serco is to the public sector, here are a few examples of Serco's current UK activities:
- Operating prisons and detention centres.
- Running MoD research facilities.
- Operating the Docklands Light Railway, Northern Rail and Merseyrail.
- Providing back-office services to the NHS.
Global expansion
Although 56% of Serco's revenues come from the UK, growth is slowing in this market and the company is targeting two types of expansion.
The first area of expansion is Serco's AMEAA region (Americas, Middle East and Australasia), which delivered 37% organic growth in 2011. Much of this came from the Australian market, where Serco is gaining a foothold in the prison and health-service arenas.
The second area of expansion is business process outsourcing. This is part of Serco's plan to move higher up the outsourcing value chain, to the point where it runs entire organisations, rather than just doing the donkey work.
Buy and hold
Serco shares currently trade on a price-to-earnings ratio of just 12 -- below the FTSE 100 average and lower than it has been for many years. Although Serco only yields 1.5% and is unlikely to become a multi-bagger, what it does offer is safety and year-on-year growth, for decades to come.
I think this is a top quality buy-and-hold share -- one to pick up now and forget about.
Why not leave a comment below and let me know if you agree?
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