Serco Group plc half year results 2020

Six months ended 30 June

2020

2019

Change at reported currency

Change at constant currency

Revenue(1)

£1,822.2m

£1,475.5m

+24%

+24%

Underlying Trading Profit (UTP)(2)

£77.6m

£50.6m

+53%

+53%

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

£89.1m

£17.2m

+418%

+417%

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

3.86p

2.62p

+47%

+46%

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

 5.66p

(0.15p)

Free Cash Flow(4)

£80.9m

£0.4m

Adjusted Net Debt, 2019 pro-forma(5)

£142.9m

£200.6m

Reported Net Debt(6)

£502.8m

£206.7m

Very strong first half; guidance maintained for 2020.

Highlights

  • Revenue(1): grew by 24% to £1.8bn, with organic growth of 15% and a 9% uplift from the acquisition of the Naval Systems Business Unit of Alion in North America (NSBU).
  • Underlying Trading Profit(2): increased by 53% to £78m, with NSBU adding 20%. Group margin increased from 3.4% to 4.3%.
  • Reported Operating Profit: increased by £72m to £89m as a result of the strong increase in underlying profit and exceptional items.
  • Underlying EPS: increased by 47%, reflecting the growth in Underlying Trading Profit, partially offset by higher interest and tax. 
  • Free Cash Flow(4): improved to £81m, or £32m excluding the deferral of £49m of tax payments.
  • Adjusted Net Debt(5): fell £58m to £143m. Underlying leverage stands at 0.7x EBITDA or 0.9x excluding tax deferrals.
  • Order Intake: strong at £1.9bn; >100% book-to-bill. Approximately 60% of the order intake related to existing contracts being rebid or extended and 40% was new work.
  • Order Book: increased from £14.1bn at the end of 2019 to £14.5bn.
  • Pipeline: value of larger new bid opportunities has reduced from £4.9bn to £4.1bn, reflecting recent contract wins.
  • Government support: subject to circumstances at the time our intention is to pay taxes deferred by government by year end; we are not planning to apply for UK government re-employment incentives.

Rupert Soames, Serco Group Chief Executive, said: “Operationally, the first half has been dominated by the rapid adjustments which have had to be made in the way we deliver our services as a consequence of Covid-19.  The response of colleagues has been exemplary and they have worked throughout with the same courage, dedication and commitment as their public-sector co-workers on the front line in prisons, hospitals, trains, ferries, defence establishments and immigration facilities.  As a result of the significant investments we have made in recent years, our management teams, business processes and systems have shown themselves to be capable of responding at great speed and effectiveness to governments’ needs.  We commissioned the UK’s first drive-through test centre in two days; in Australia accommodation was provided for more than 1,300 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.  We think that these and other examples will reinforce in our customers’ minds the value Serco can bring and the need more generally of governments to have vibrant, resilient and secure supply chains that can support public services in good times and bad.  

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Financially, the performance in the first half has been exceptionally strong, largely as a result of contract wins in 2019 and the acquisition of the Naval Systems Business Unit of Alion last August; Covid-19 has had little effect on profits; although there have been some dramatic impacts, positive and negative, on individual contracts, in aggregate the “ups” on profits have balanced the “downs”.  Revenues were up 24% and Underlying Trading Profit increased by 53%; Reported Operating Profit increased from £17m to £89m.  Pleasingly, at a time when a number of tenders have been delayed as a result of the crisis, our order intake was once again ahead of our revenues giving us a positive book-to-bill ratio.  Free Cash Flow increased by £80m year-on-year, and Adjusted Net Debt fell by £58m to £143m; cashflow benefitted from tax payment deferrals of around £49m; excluding the temporary benefit of these deferrals, our underlying leverage would stand at 0.9x EBITDA, slightly below our target range of 1-2x.  Subject to trading in the second half, it would be our intention to pay taxes deferred by the end of the year, even if not strictly required to do so, and we do not intend to take advantage of the UK government’s £1,000 per person re-employment incentive as we do not think it right that we should take money from the taxpayer to employ people who will be delivering services paid for by the taxpayer.

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Serco’s strategy of focusing on supporting governments around the world in the delivery of public services is working well for us.  In the Outlook sections we describe some of our thinking on how the current crisis will change our business in the years ahead as governments grapple with conflicting needs: to help people get back to work; to build quality and resilience into public services; to tame ballooning deficits.  In other words, how to deliver more, and better, for less – an approach we have been promoting since 2014.

We re-instated guidance for 2020 in our trading update on 17th June, saying that we expected revenue to be around £3.7bn (2019: £3.2bn), and Underlying Trading Profit of £135-£150m (2019: £120m).  Nothing in recent weeks has changed our view, although, as set out in our Outlook section, Covid-19 has introduced a greater degree of risk around our guidance than would normally be the case.”

FY 2020 guidance as at 6th August 2020

Movement to prior guidance
as at 17th June 2020 

Revenue

~£3.7bn

Unchanged

Organic sales growth

~9%

Unchanged

Underlying Trading Profit

£135m-£150m

Unchanged

Net Finance Costs

~£27m

Unchanged

Underlying effective tax rate

~25%

Unchanged

Free Cash Flow

Broadly similar to 2019 at +£62m

Unchanged

Adjusted Net Debt

~£200m

Unchanged



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