Serco Group plc (‘Serco’ or ‘the Group’), the international provider of services to governments, today provides an unscheduled update in lieu of its normal scheduled closed period update. The update has been brought forward as a consequence of the Board reviewing the latest management forecasts and determining that it is in a position to reinstate guidance for the 2020 financial year. Serco will be in a closed period between 1 July 2020 and publication of the results for the first half of the 2020 financial year on Thursday 6 August 2020.
Highlights of expected first half performance
- Revenue growth of around 23%, including organic growth of 14%.
- Underlying trading profit of £75m-£80m, around 50% higher than the first half of 2019, driven primarily by our overseas businesses including the impact of the acquisition in August 2019 of the Naval Systems Business Unit of Alion in North America.
- Significant operational challenges as a result of Covid-19 but limited financial impact in the first half, as the losses in some parts of the Group have been largely offset by additional work to help our customers elsewhere.
- Strong order intake of around £1.8bn; book-to-bill ratio expected to be around 100%.
- Robust financial position with headroom on our committed facilities expected to be at least £300m at 30 June; adjusted net debt expected to be around £200m, and leverage around 1.0x.
- Reinstating guidance, reflecting the resilience of our business as a supplier of critical services to governments globally.
Commenting on today’s update, Rupert Soames, Serco Group Chief Executive, said:
“The conduct of Serco colleagues during this difficult time has been exemplary, and proud-making. The impact of this virus is very real to us as seven of our colleagues have died as a consequence of the disease and many others have lost friends and relatives. Notwithstanding this, people are working day-in-day-out, many in challenging environments such as prisons, hospitals, trains and asylum-seeker accommodation, serving their fellow citizens and governments. Thanks to the significant investments we have made in the last few years in people and systems, the business has shown itself capable of remarkable agility and effectiveness in response to governments’ needs. By way of examples, we commissioned the UK’s first drive-through test centre in two days; in Australia accommodation was provided for 1,500 quarantined travellers on one week’s notice; and as part of the NHS Test & Trace programme we mobilised 10,500 contact tracers in a four-week period. Worldwide, we have mustered over 15,000 full and part-time people to help governments respond to the crisis.
The company is expected to deliver a very strong performance in the first half, with underlying trading profits likely to increase by around 50%, and revenues by around 23%. Much of this growth is coming from our businesses outside of the UK and results from contracts won in 2019 as well as the acquisition of the Naval Systems Business Unit of Alion for $225m in August 2019. Covid-19 has had little overall impact on our profits in the first half; although we are sustaining significant losses in some areas of our business, notably in Leisure and Transport, these have so far been largely offset by additional work in Citizen Services. Order intake in the first half has been strong, and we expect to achieve a book-to-bill ratio of around 100%. Liquidity is strong, and we expect leverage to be near the bottom end of our target range.
Being able to reinstate guidance for the full year reflects the resilience of our business, which depends for its revenues on governments rather than businesses or consumers, our strong order book, and growing confidence that our people and systems can adapt effectively to the challenges of Covid-19. Clearly, there is a more than normal degree of risk in our guidance, but we feel it better that we give some indication rather than none.”
Expected outcome for the first half of 2020
Revenue: We expect revenue of around £1.8bn in the first half of 2020, around 23% higher than the £1.5bn reported in the first half of 2019. The acquisition of NSBU has added 9% to our revenue, whilst currency is expected to have a 1% adverse impact. Our organic revenue growth is expected to be in the region of 14% for the half. The high level of organic growth has been supported by large new contracts that started in the second half of last year including the AASC asylum accommodation and support contract in the UK, and the AHSC defence garrison healthcare services contract in Australia. Whilst we have seen increased revenues as a result of additional Covid-19 work, some contracts have seen sharply reduced demand, notably leisure centres and rail services in the UK, air traffic control and airport services in the Middle East, and driver licence examination and administration in Canada.
Underlying trading profit (UTP): We expect first half UTP of £75m-£80m, about 50% more than the £51m reported last year. The NSBU Naval business, acquired in Q3 2019, is performing in line with our expectations and will contribute about £10m of the growth in UTP, including the effect of efficiencies in indirect overheads. Two of the largest contracts won in 2019 – AASC in the UK and AHSC in Australia – moved from losing money in the first half of 2019 as mobilisation costs were incurred, to profitability in the first half of 2020. The CMS contract in North America benefitted as the temporary uplift in volume related work we saw last year has persisted for longer than expected. We expect to report a £2m non-recurring benefit to UTP as we exit our Viapath joint venture. Excluding the positive impact on the income statement of the utilisation of Onerous Contract Provisions (£42m in H1 2019 and c.£3m in 2020), profits are expected to increase by around £65m in the first half.
We have mobilised some large contracts in the UK to support the NHS Test & Trace programme and are now operating 20 drive-through test centres with a capacity of over 22,000 tests a day, and have provided 10,500 people as Tier 3 tracers. Given the exceptional circumstances, we have agreed to perform these contracts on an open-book basis and at margins below our normal expectations. Overall, across the Group, the benefits from additional business related to Covid-19 has roughly matched the losses incurred on contracts in the Leisure and Transport sectors.
Financial position: We expect adjusted net debt to be around £200m at the end of June and leverage of around 1.0x, compared to our covenant of 3.5x. We expect headroom on our committed finance facilities to be at least £300m. This has been supported by our government customers continuing to pay promptly and we, in turn, are paying our supply chain in a timely manner. We have utilised VAT and other tax payment deferrals of £50m but expect to accelerate the repayments so they are made in the second half of the year, rather than when they are due in 2021. Without these deferrals, our leverage would be 1.2x at the end of June.
Order intake: Order intake has been strong in the first half at around £1.8bn, roughly the same level as our revenue. This includes the contract to continue operating the Northern Isles Ferry Services, which has a likely total contract value of £450m, the £370m Fiona Stanley Hospital contract extension, Gatwick Immigration Removal Centre, valued at £200m, as well as additional business related to Covid-19.
Guidance for the 2020 financial year
We have decided to reinstate guidance for 2020. As we have previously observed, our profits can be significantly affected by even small changes in revenues and costs, and the current circumstances mean the risk of one or both being outside our expectations is higher than normal. However, we believe that it is better to say what we believe to be the case and give some guidance rather than none. Our new guidance for 2020 is:
Prior guidance (withdrawn 2 April)
Organic sales growth
Underlying trading profit
Net finance costs
Underlying effective tax rate
Free cash flow
Broadly similar to 2019 at +£62m
Broadly similar to 2019
Adjusted net debt
Notes: The free cash flow and adjusted net debt guidance assumes accelerated repayment in 2020 of the tax payment deferrals. Prior guidance was withdrawn on 2 April due to the uncertainty created by Covid-19. The guidance uses an average GBP:USD exchange rate of 1.25 in 2020 and GBP:AUD of 1.89.
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