Outsourcing firm Serco forecasts higher full-year profit

By Esha Vaish (Reuters) - British outsourcing firm Serco Group Plc forecast 2016 profit ahead of current market expectations, benefiting from several contracts running for longer and others being more profitable. Shares in Serco soared as much as 13 percent, with analysts saying the "surprise" guidance hike was a positive and it would leave the group in a strong net debt position by the end of the year. The stock was the top percentage gainer on the FTSE 250 midcap index <.FTMC> on the London Stock Exchange on Wednesday. Serco has suffered in recent years following problems with government contracts that included overcharging the British government for monitoring criminals and escalating costs on a deal to provide accommodation to UK asylum seekers. A review of Serco's 700 contracts, launched by CEO Rupert Soames in 2014, found that the group's emphasis on winning government work to fuel sales growth had come at the expense of margins, meaning a string of deals now operate at a loss. However, its turnaround plan has been showing encouraging signs and Serco's 2015 profit beat expectations and net debt fell as a result of a rights issue of new stock and disposal of its Indian offshore call centre. Serco said on Wednesday several contracts had run longer than previously anticipated, including the Virginia transport and U.S. Army transition assistance deals. It also said it expected the final settlement on its contract with Northern Rail to be more favourable than was originally budgeted. Citing the cash benefits, Liberum analysts cut their 2016 net debt estimate to 156 million pounds ($229 million) from 171 million pounds. Underlying trading profit is expected to be not less than 65 million pounds, ahead of the previous forecast of about 50 million pounds, Serco said, adding that it had also seen some benefits from currency movements. Revenue was expected to be about 2.9 billion pounds, higher than a previous guidance of about 2.8 billion pounds. However, as Serco still contends with the impact of several loss-making contracts and the disposal of its offshore call centre, the figures are still lower than the profit of 138 million and revenue of 3.5 billion pounds reported for 2015. Serco said its expectations remained unchanged for 2017, when onerous contract provisions are expected to be a drag on free cash flow. "Delivering sustainable growth requires winning new contracts. This still remains elusive," Stifel analysts wrote in a note, reiterating their "hold" rating on the stock. (Reporting by Esha Vaish in Bengaluru; Editing by Sunil Nair)