Serco Group plc full year results 2020

Year ended 31 December

2020

2019

Change at reported currency

Change at constant currency

Revenue(1)

£3,884.8m

£3,248.4m

+20%

+20%

Underlying Trading Profit (UTP)(2)

£163.1m

£120.2m

+36%

+37%

Reported Operating Profit (i.e. after exceptional items)(2)

£179.2m

£102.5m

+75%

Underlying Earnings Per Share (EPS), diluted(3)

8.43p

6.16p

+37%

Reported EPS (i.e. after exceptional items), diluted

10.67p

4.21p

+153%

Dividend Per Share (recommended re-instated)

[1.4p]

Free Cash Flow(4)

£134.9m

£62.0m

+118%

Adjusted Net Debt(5)

£57.8m

£214.5m

-73%

Reported Net Debt(6)

£460.4m

£584.4m

-21%

Very strong year across global business in 2020; guidance increased for 2021.

Highlights

  • Revenue: grew by 20% to £3.9bn, with organic growth of 16%, a 5% uplift from our US acquisition in August 2019 of NSBU and -1% from currency.

  • Underlying Trading Profit: increased by 36% to £163m, with NSBU adding 8%; net impact of Covid-19 around £2m, or ~1% of UTP.  Margin increased from 3.7% to 4.2%. Around three-quarters of our profit(7) is now from outside the UK.

  • Reported Operating Profit: increased by 75%, or £77m, to £179m, as a result of the 36% increase in underlying profit and an exceptional gain on disposal.

  • Earnings per Share: increased by 37% on an underlying basis and 153% on a reported basis. 

  • Free Cash Flow: more than doubled, to £135m.

  • Adjusted Net Debt: reduced by £157m to £58m. Covenant leverage stands at 0.5x EBITDA.

  • Order Intake and Pipeline: some customer decisions slipped from Q4 2020 to Q1 2021, leading to order intake of £3.1bn (80% book-to-bill) and significant year-on-year increase in year-end qualified pipeline of new business to £6.4bn (2019: £4.9bn).

  • Government support & employee recognition: the Group has repaid all UK government employment and liquidity support, including £2m of furlough payments, and has made ex-gratia payments totalling £5m to around 50,000 front-line staff.

  • Dividends: the Board recommends restarting dividends, last paid to Serco shareholders in 2014, with a payment of 1.4p in respect of the 2020 financial year.

  • Acquisitions: in January 2021 we acquired Facilities First Australia (FFA), a leading Australian facilities management company for A$78m.  In February 2021 we announced the acquisition, subject to regulatory approval, of Whitney, Bradley & Brown Inc (WBB), a leading provider of technical and engineering services to the US military for a consideration of $295m.

  • Outlook for 2021(8): having delivered compound annual growth in profits of 33% over the last three years, we expect revenues and trading profit to continue to grow in 2021, albeit at a slower rate than seen in recent years.  Reflecting a strong start to the year, we have increased our profit guidance for 2021 by 6%, which equates to year-on-year growth at constant currency of 10%.  This excludes the effect of the acquisition of WBB. Guidance will be updated for this following completion.

Rupert Soames, Serco Group Chief Executive, said: “In the coming months, every company’s trading statement will pay glowing tributes to employees, and thank them for their resilience and courage.  I have struggled to think of words that are not trite or clichés and will not be repeated by a thousand other CEOs, so I will use instead the words of a colleague, whose job is escorting prisoners, who wrote to me in January: 

“Working as a Custody Officer is both challenging and rewarding, yes, the current situation with the virus has certainly changed the way in which we work and has made day to day life more challenging for everyone within Serco but also for the entire world.  My husband has cancer and also a disease which has caused him to have no immune system. People have asked me why I would continue to work knowing that every day when I go home to him, I am putting his health at risk.  The answer to this question is this: if everyone took that attitude then businesses would suffer more than they are already, people like myself and my colleagues are what keep the contract running, and without my work

to focus on I am sure I would have gone crazy by now.  Both my husband and I know that life throws us curve balls now and again and we have to get on and make the best of it and most importantly never give in! My husband and I acknowledge how precious life is, we are as careful as we possibly can be in protecting ourselves and others and acknowledge that life has to go on. Serco has looked after its employees very well throughout this terrible time.  I am grateful to be able to work every day in a job that I love doing.”

Around 90% of our 55,000 colleagues cannot work from home, because they work in places such as prisons, hospitals, ships, or trains.  They have turned up each day to enable us to deliver our promise of supporting the delivery of public services; many have suffered loss, either of colleagues, friends or family, and still turned up for work.  My respect and gratitude for them is unbound, and I want to extend our condolences to the families of those colleagues who have died from Covid-19 over the last year.  

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Turning to our financial performance in 2020, growing Revenues by 20% (2019: +15%) and Underlying Trading Profit by 36% (2019: +29%), is all the more impressive as it follows strong growth in 2019 and underlines the momentum behind Serco’s return to robust financial health.  This performance is particularly gratifying given the disruption caused to some parts of our business by Covid-19; despite approaching £400m of Covid-19 related revenues, the net impact of Covid-19 was around 1% of Underlying Trading Profit, and the balance of the 35% increase in profits came from the normal operations of the business. 

Our free cash flow, now released from the drag of recent years of Onerous Contract Provisions, was very strong at £135m, which, combined with strong growth in EBITDA brings our covenant leverage ratio down to 0.5x, which puts us in a very strong financial position.  This has enabled us to finance the recently announced acquisition of WBB from our existing debt facilities and still be around the middle of our target leverage range of 1-2 times Net Debt : EBITDA.

It is pleasing finally to be able to re-start paying dividends, last paid in 2014. The Board has thought carefully about this, particularly in the light of the current circumstances; in April 2020, we justified withdrawing the proposed Final Dividend in respect of 2019 saying: “At a time when the UK and other governments are helping Serco with its liquidity, it seems inappropriate to use that cash for anything other than its intended purpose of protecting the financial strength and resilience of our business”.  Subsequently, and for the same reason, we did not propose a dividend at the half year in August 2020.  Four things have changed for us since the earlier decision-points in April and August.  First, any concerns we had about liquidity have proved groundless; we have successfully re-entered the long term private placement debt market (and at lower cost); we have been strongly cash-positive in 2020; leverage is below our target range at year end, and even after the WBB acquisition would sit comfortably within our target range.  Secondly, we have refunded all employment and liquidity support paid to Serco by governments, with the exception of £12m in the USA, for which there is no mechanism for early repayment, so will be repaid as scheduled in 2021 and 2022.  Thirdly, whilst the profits arising from our work on Covid-19 are ephemeral, they do not represent a material proportion of our profits in the year (net, around 1% of Underlying Trading Profit).  Finally, we have sought to recognise the intense pressure and extra work that Covid-19 has brought to our staff by making ex-gratia payments totalling £5m to 50,000 of our front line colleagues.  In the light of these four considerations, the Board feels it appropriate to recommend the payment of a final dividend in respect of 2020 of 1.4p per share, representing a 25% payout ratio assuming a notional 1/3rd / 2/3rd split between interim and full year dividends.

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Looking ahead to 2021, guidance set out below is improved from that which we gave in December. It does not reflect the acquisition of WBB, announced on 16 February, which is subject to regulatory approval; guidance will be updated immediately after completion, which is expected to be during the course of Q2.  After the dramatic growth of the last three years – with 33% compound annual growth in Underlying Trading Profit –  we see 2021 as being a year of more normal rates of growth in revenues and profits; we will have some “drags” on our profitability, notably only having six months of the AWE contract, and we expect revenues related to Covid-19 services to be much stronger in the first half than in the second.  However, we have had a strong start to the year, and we are therefore increasing our profit guidance for 2021, with the revised guidance equating to 10% constant currency growth in the year.

2020

2021  

Actual

Initial guidance

New guidance

Revenue

£3.9bn

~£4.1bn

~£4.2bn

Organic sales growth

16%

~2%

~4%

Underlying Trading Profit

£163m

~£165m

~£175m

Net finance costs

£26m

~£27m

~£27m

Underlying effective tax rate

23%

~25%

~25%

Free Cash Flow

£135m

~£75m

~£75m

Adjusted Net Debt

£58m

~£100m

~£100m

Notes to guidance: The guidance uses an average GBP:USD exchange rate of 1.37 in 2021 and GBP:AUD of 1.79.  If the WBB acquisition completes in Q2, we would expect our Net Debt : EBITDA to be around 1.6x at the half year and reduce thereafter.

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