Samad Masood
Strong year from Serco, but SITS potential is unclear
Serco, the support services giant, has reported total revenues up 38% to £2.3bn for the year ended 31 December 2005. Operating profit grew 40% to £97m, resulting in a very slight margin improvement to 4.3%. Profit before tax was up 22% to £78m, with earnings per share up 15% to 11.66 pence. Serco announced a dividend of 2.97 pence per share.Serco Solutions, which was created through the £246m acquisition of UK SITS player ITNET in February 2005, contributed £191m in revenues and £14m in profit before tax to the group results. Overall organic revenue growth for Serco was 19%, which excludes, among other things, the revenues of ITNET, and the acquisition of US-based federal support services player RCI during the year.Across vertical sectors, civil government, under which most of Serco Solutions falls, grew revenues by 28% to £804m. This compares with the 59% growth in the transport sector to £549m, 52% growth in defence to £566m, and 18% growth in science to £342m on margins of 4.5%, 5.9% and 9.1% respectively. Comment: Overall, this has been a very strong year for Serco, with significant expansion of its business within the UK and North American markets. But these results still do not convince us that Serco has been able to extract the best value out of the ITNET acquisition so far.It is true that since the acquisition, Serco Solutions, as it is now known, has kept up a steady pace of wins in the SITS market. Notable examples are the £125m DTI Small Business Service contract won in November 2005, and the win of a place in the Raytheon consortium (including Accenture and Detica) which was shortlisted to bid for the UK Government's e-borders project. If successful, Serco says this could be worth around £360m. But there have been disappointments too - namely the loss of the long-standing contract with Hounslow Council to rival Liberata. All in all, we get the impression that Serco Solutions' revenues have been at best flat year-on-year, based on the numbers that Serco has released and our knowledge of ITNET before the acquisition. Serco will be releasing more details on its results later in the day, and we will update readers on any new information regarding its SITS aspirations then.
