Company Announcements

Closed period trading update

Source: RNS
RNS Number : 9279I
Serco Group PLC
17 December 2020
 

Closed period trading update

 

17 December 2020

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

 

Serco Group plc ('Serco' or 'the Group'), the international provider of services to governments, today provides its scheduled closed period update of trading for the 2020 financial year, together with its initial outlook for 2021.  This update should be read in conjunction with three other announcements this morning: the retirement in April 2021 of Angus Cockburn as Group Chief Financial Officer, with Nigel Crossley named as his successor; the acquisition for a consideration of A$76.5m (£43m) of Facilities First in Australia; and the award of a rebid of Acacia Prison in Australia, valued at A$445m (£250m) for its initial five year term, and up to A$1.4bn (£790m) if it runs for its full fifteen year term.  Serco will be holding meetings with analysts today, during which no additional material information will be disclosed.

 

Highlights

·      Revenue in 2020 expected to grow by 19% to £3.9bn, with organic growth of 16%.

·      Underlying Trading Profit (UTP) expected to grow by around 35% to £160m-£165m, consistent with previous guidance, with the margin increasing by around 40bp to slightly above 4%.

·      Significant Covid-19 impacts, both positive and negative, across most business around the world.  Impact likely to be a positive contribution of around 4% of UTP, comprising 9% of trading upside, partially offset by around 5% of UTP in refunds of furlough payments and ex-gratia payments to around 50,000 front-line staff.

·      Robust financial position with adjusted net debt expected to be less than £100m, leverage around 0.5x and ample liquidity.

·      Since the start of the year Serco has created, directly and with its sub-contractors, over 10,000 net new jobs worldwide, most of them supporting governments' Covid-19 response.

·      Our initial outlook for 2021 is for revenue and UTP to be slightly higher than 2020, reflecting a similar performance for the existing business and a small increase from the acquisition of Facilities First in Australia.

 

Commenting on today's update, Rupert Soames, Serco Group Chief Executive, said:

 

"In what will be remembered as one of the most challenging periods for businesses since the Second World War, Serco's people have proved themselves to be resilient, flexible and dedicated to ensuring the delivery of public services.  Our "loose-tight" business model and core processes and systems have also proved to be robust and have responded extremely well to the demands placed upon them.  This has allowed us to react swiftly and effectively to very significant swings in both costs and revenues;  some businesses have seen very significant falls in revenues (Leisure, Transport); others (Citizen Services, Immigration) have had to respond to higher demand; others (Custodial, Defence, Health) have seen their costs increase.  But across all our businesses it has been gratifying to see customers turning to Serco as a trusted and capable partner to help them deal with the enormous challenges they have faced.

 

The overall outcome is a robust business performance in 2020, ahead of the expectations we had at the beginning of the year, with an expected 16% organic growth in revenues; a ~35% increase in Underlying Trading Profit; margins increasing from 3.7% to slightly above 4%; strong cash generation; net debt under £100m; covenant leverage falling to around 0.5x net debt : EBITDA; and ample liquidity with our long term debt successfully refinanced in October at lower interest rates and tenors out to 12 years.

 

In terms of our outlook for next year, like nearly every other business, we continue to face unprecedented levels of uncertainty.  In our budgeting process we have come to what we believe are reasonable judgements, but the timing and shape of the return to normality, and the impact that this may have on our individual businesses around the world is largely unknowable.  Rather than react to these difficult circumstances by not giving guidance, our approach is to be transparent with investors and tell them what our best judgement is, recognising that it might subsequently prove to be wrong, and update that view if the judgement changes.  As of now, our belief is that in 2021 we will be able to deliver revenues and profits at a similar level to 2020 on the existing business, and slightly higher than 2020 as a result of the Facilities First acquisition. We expect to see strong cash generation and low levels of debt which will give us the strategic freedom of manoeuvre to take advantage of any opportunities which may arise." 

 



 

Expected outcome for 2020

 

Revenue.  We expect revenue of around £3.9bn in 2020, around 19% higher than the £3.2bn reported in 2019.  The NSBU naval business in North America, acquired in August 2019, has added 5% to our revenue and currency is expected to have a 1% adverse impact.  Organic revenue growth has continued to accelerate, from the 4% in H1 19, 12% in H2 19, 15% in H1 20 and 17% expected in H2 20. The strong growth in the second half of this year has been driven by the UK and Australia; most of the growth in the UK came from Covid-19 related services, the mobilisation of Gatwick Immigration & Removal Centre, Prisoner Escorting, and our Asylum-seeker Accommodation and Support Contract (AASC).  In Australia, Clarence Correctional Centre opened in June, and both Services Australia and our Immigration Services businesses saw strong demand.  

 

Underlying trading profit (UTP).  We expect full year UTP of £160m-£165m, about 35% more than the £120m reported last year.   The NSBU acquisition is performing in line with our expectations and will contribute about £10m of the growth in UTP, while currency is expected to reduce UTP by around 1%.  In the first half, UTP increased by 53% and we expect the second half to grow by  approximately 20%, driven by the additional work in the UK and Australia; the lower growth rate in the second half reflects the effect of lapping the NSBU acquisition, completed in August 2019, as well as the start of the AASC and AHSC contracts in the second half of 2019.  The sharp declines in profitability we saw in the first half in some of our businesses, notably Leisure, Transport, and Health in the UK and Air Traffic Control, Airport Services in the Middle East, have largely continued in the second half, reflecting recurring lockdowns.  However, other contracts have grown rapidly, and overall Covid-19 is expected to contribute in the region of 4% to expected 2020 UTP, comprising 9% of net benefit from trading partially offset by around 5% of UTP in repayments of furlough and ex-gratia payments to front-line staff (see below).  Our work on NHS Test & Trace continues to grow, and we have recently been asked to substantially increase the number of call handlers we provide; the number of test centres we are supporting has also increased to 200 regional, local and mobile sites. Despite the distractions of Covid-19 we continue to invest energetically in our systems and initiatives to improve efficiency, capability and the service delivery.

 

Financial position.  We expect adjusted net debt to be below £100m at the end of December and leverage of around 0.5x. This is an improvement on our earlier guidance as a result of strong cash collection across the group.  Headroom on our committed finance facilities is expected to be at least £600m at the year end.

 

Return of government support & employee recognition.  Recognising that the Group has continued to trade strongly throughout the crisis, we intend to return direct support received from governments in the form of tax deferments and furlough payments.  The Group has already repaid early £38m of deferred UK taxes, which mainly relate to VAT.  We will repay as soon as there is a mechanism to do so around £15m of employee tax deferrals in the United States, and we will also be repaying furlough payments received in Canada.  In the UK we will repay the Coronavirus Job Retention Scheme (furlough) payments received by Serco from the UK Government in respect of employees of Serco and its subsidiaries.  Recognising the extraordinary efforts of our staff around the world during the pandemic, we will be distributing a one-off ex-gratia payment to around 50,000 of our front-line staff.  We expect that the combined cost of furlough repayments and one-off payments to staff will amount to around £8 million, or 5% of 2020 Underlying Trading Profit, which compares to the 9% trading benefit to Underlying Trading Profit received from our various contracts.

 

Dividend.  At our Half Year Results in August we said that the Board would re-consider whether it should pay all or some of the dividends (2019 Final and 2020 Interim) previously withdrawn or deferred.  Given subsequent events, and specifically the "Second Wave" of Covid-19 infections, the Board believes that this is not the right time to make a decision on the resumption of payments of dividends, and will reconsider the position again at the time of the publication of our Final Results for 2020. Likewise, payment of the cash element of Executive Director bonuses earned in respect of 2019 performance, which was deferred when we announced the withdrawal of the Final 2019 dividend, will be further deferred and also reconsidered at the time of our 2020 Final results.

 

Share purchases.  With our balance sheet now restored to robust health, we intend to buy up to £40m of shares in the coming months, which will be held in Treasury, and subsequently used either for existing employee share schemes or cancelled.

 

Community Support.  At the onset of the pandemic the Serco Foundation, an independent Charitable Trust funded mainly by Serco, set up a Coronavirus Community Support Fund, whereby employees suggest causes they think worthy of support; we are proud to say that so far the Foundation has distributed over £600,000 to 300 charities under this scheme.

 



 

Guidance for 2020 and 2021


2020

2021


Prior guidance

New guidance


Revenue

~£3.9bn

~£3.9bn

~£4.1bn

Organic sales growth

~15%

~16%

~2%

Underlying Trading Profit

£160m-£165m

£160m-£165m

~£165m

Net Finance Costs

~£27m

~£27m

~£27m

Underlying effective tax rate

~25%

~25%

~25%

Free Cash Flow

~+£100m

Above £100m

~£75m

Adjusted Net Debt

£100m-£150m

 Below £100m

~£100m

 

Notes to guidance: The guidance uses an average GBP:USD exchange rate of 1.29 in 2020, 1.34 in 2021 and GBP:AUD of 1.88 in 2020, 1.81 in 2021. We expect a weighted average number of shares of 1,255m for diluted EPS in 2020 and 1,262m in 2021, before the impact of any shares cancelled as part of the share purchases. Guidance for 2021 includes the acquisition of Facilities First Australia, also announced today.

 

 

Outlook for 2021

 

Having recently completed our budget process, our initial outlook for 2021 anticipates a year of stable revenue, UTP and earnings for the existing business, with a small uplift to reflect the acquisition of Facilities First Australia, announced today.  However, in common with many other businesses we face unprecedented levels of uncertainty in 2021, and the outlook has a wider-than-usual margin for error.  Particular examples where outcomes may be significantly different to our budgets include: the timing and extent of openings of our Leisure Centres; timing of resumption of normal services on Merseyrail, NorthLink ferries and Caledonian Sleepers; the revenues and margins generated by our support for work on UK NHS Test & Trace; volumes on CMS and workplace restrictions on DES and Defence contracts in the US; volumes on Citizen Services and Immigration Services in Australia; air traffic volumes in the Middle East.

 

Revenue: Revenue in 2021 is expected to be around £4.1bn, approximately 5% higher than the £3.9bn expected outturn for 2020.  This assumes 4% from the acquisition of Facilities First Australia (FFA), organic growth of 2% and a 1% adverse impact from currency.  We will have an ongoing positive contribution from several of the contracts that have supported growth in the second half of 2020, including Prisoner Escorting, Gatwick IRC and Clarence Correctional Centre.  Predicting the outcome for our Covid-19 related work is difficult due to the speed of change with the pandemic and the potential for rapid changes in demand from our government customers. Our current expectation is that the level of work will be lower in 2021 but the range of potential outcomes is wide.

 

Underlying Trading Profit: UTP is expected to be similar to 2020, at around £165m, including approximately £6m from FFA and a currency headwind of £3m, based on current exchange rates.  The year will benefit from the annualisation of our new contracts from 2020 and we anticipate some improvement in the parts of our business negatively impacted by Covid-19 in 2020. These should offset the cessation of our involvement in the Atomic Weapons Establishment at the end of June 2021, higher insurance costs and a lower level of profit on our Center for Medicare & Medicaid Services (CMS) contract as the high volumes we saw in 2020 fall away; we also expect to see a reduced contribution from our Anti-Terrorism / Force Protection (ATFP) framework contract for US Naval Facilities, which is subject to a re-bid.

 

Net finance costs and tax: Net finance costs are expected to be around £27m. This is similar to 2020 as the lower level of debt is temporarily offset by us paying interest on both our new US private placement notes and the existing notes that will mature in May and October 2021 as well as the acquisition of FFA.  The underlying effective tax rate is expected to continue at around 25%, although this is sensitive to the geographic mix of our profit and any changes to current corporate tax rates. 

 

Financial position: We expect Adjusted Net Debt to be to approximately £100m. Strong cash generation will be balanced by us repaying about half the of £15m in US employment tax deferrals in 2020, the acquisition of FFA and a likely £40m of shares being purchased to be held in Treasury and subsequently deployed either to provide shares for employee share schemes or to be cancelled. Free cash flow is expected to reduce in 2021 due to the repayment of US tax deferrals, the purchase of shares for employee share schemes and because 2020 benefitted from catch up on delays in processing billings on our FEMA contract in the US.

 

 

 

Ends

 

For further information please contact:

Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or email: paul.checketts@serco.com

Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email: marcus.deville@serco.com

 

About Serco

Serco is a leading provider of public services. Our customers are governments or others operating in the public sector.  We gain scale, expertise and diversification by operating internationally across five sectors and four geographies: Defence, Justice & Immigration, Transport, Health and Citizen Services, delivered in UK & Europe, North America, Asia Pacific and the Middle East.

 

More information can be found at www.serco.com

 

 

Forward looking statements

This announcement contains statements which are, or may be deemed to be, "forward-looking statements" which are prospective in nature.  All statements other than statements of historical fact are forward-looking statements.  Generally, words such as "expect", "anticipate", "may", "could", "should", "will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" and similar expressions identify forward looking-statements.  By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements.  Factors which may cause future outcomes to differ from those foreseen or implied in forward-looking statements include, but are not limited to: general economic conditions and business conditions in Serco's markets; contracts awarded to Serco; customers' acceptance of Serco's products and services; operational problems; the actions of competitors, trading partners, creditors, rating agencies and others; the success or otherwise of partnering; changes in laws and governmental regulations; regulatory or legal actions, including the types of enforcement action pursued and the nature of remedies sought or imposed; the receipt of relevant third party and/or regulatory approvals; exchange rate fluctuations; the development and use of new technology; changes in public expectations and other changes to business conditions; wars and acts of terrorism; cyber-attacks; and pandemics, epidemics or natural disasters.  Many of these factors are beyond Serco's control or influence.  These forward-looking statements speak only as of the date of this announcement and have not been audited or otherwise independently verified.  Past performance should not be taken as an indication or guarantee of future results and no representation or warranty, express or implied, is made regarding future performance.  Except as required by any applicable law or regulation, Serco expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this announcement to reflect any change in Serco's expectations or any change in events, conditions or circumstances on which any such statement is based after the date of this announcement, or to keep current any other information contained in this announcement.  Accordingly, undue reliance should not be placed on the forward-looking statements.

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