Serco says on road to recovery, shares leap

By Elisabeth O'Leary and Esha Vaish

(Reuters) - British outsourcing firm Serco Group Plc (SRP.L) raised its 2016 profit forecast for the second time this year and also said Britain's vote to leave the European Union could bring opportunities as well as costs.

"The company is now well on its way to recovery. This is the first reporting period for years in which profit has gone up," Rupert Soames, Serco's Chief Executive Officer, told Reuters.

Serco shares rose as much as 16 percent to 138 pence, making it the biggest gainer on London's FTSE 250 midcap index (.FTMC).

The group which provides security, traffic, defence and education services for governments across the world, reported a 9 percent rise in underlying profit to 51 million pounds ($67.8 million) despite a 16 percent decline in revenues to 1.52 billion pounds in the first six months of the year.

"There are a lot of one-offs (...) so we're not getting too carried away with it, but we are stabilising our relationship with customers and are rebuilding what is a supertanker," Soames said.

Soames, a grandson of British wartime prime minister Winston Churchill, took charge two years ago after a disastrous period of contract problems and scandals that strained the company's relations with the British government.

Serco, which depends on the British government for roughly half of its revenues, cited slightly higher-than-expected cost savings for the improvement and the fall in the value of sterling. Its expectations for 2017 were, however, unchanged.

"In our view, three upgrades in four months provides evidence that the group is being turned around," said analysts from broker Jefferies in a note to clients..

Serco said in the wake of Britain's vote to leave the EU the picture regarding government contracts and the economy was uncertain, potentially meaning more work being undertaken by the British government, citing areas such as immigration control.

But the task of exiting the EU might also mean "the diversion of government's attention, and that of many of the country's most talented civil servants, away from domestic policy towards Brexit negotiations, (and) may slow the pace of domestic reform."

Serco forecast trading profit of not less than 80 million pounds this year, up from 65 million pounds, and revenue of about 3 billion pounds, compared with a previous expectation of 2.9 billion pounds.

(Reporting by Elisabeth O'Leary in Edinburgh and Esha Vaish in Bengaluru; Editing by Adrian Croft/Keith Weir)