REG - Serco Group PLC - Capital Markets Event and initial 2022 guidance

SercoAnnouncement

02/12/2021 07:00

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RNS Number : 3001U  Serco Group PLC  02 December 2021

 

 

Capital Markets Event to set out new medium-term targets. Initial guidance
published for 2022.

2 December 2021

 

Serco will host a Capital Markets Event at 2pm UK time today, providing an
update on strategy and outlining new medium-term targets, which are described
below.  We also reiterate previous guidance for the 2021 financial year and
give initial guidance for 2022, which is in-line with analysts' consensus*.

 

Capital Markets Event

At today's event there will be presentations from group and regional
management.  We will describe how Serco has been transformed since 2014 from
a collection of unrelated commercial and government contracts generating poor
returns into a focused government services platform delivering strong growth
and returns on capital of over 20%.

 

Serco now enjoys a strong and differentiated position in the market, and our
Business-to-Government (B2G) platform gives us a unique combination of
agility, sector breadth, international reach, resilience and efficiency, to
which we have added an effective M&A capability.

 

Since 2017, this has delivered a 50% increase in revenue, and compound annual
growth in Underlying Trading Profit of 34% (£69m in 2017 to at least £225m
in 2021).  In the same period, our order book has grown from £11bn to over
£14bn with a book-to-bill ratio of around 120% and trading cash flow has
increased ten-fold.  The balance sheet has been strengthened significantly
with financial leverage expected to be below 1x net debt:EBITDA at the year
end, despite making six acquisitions in the last four years.

 

Looking forward, we expect our addressable market to grow at 2-3% per year
over the medium-term, and believe that on average we can grow our revenues at
twice that rate (4-6%) from a base year of 2022; furthermore we expect our B2G
platform to help us improve our margins by 50-100 bps to 5-6%, and to convert
at least 80% of our operating profit into cash.  Given our strong financial
position, we intend to reduce our dividend cover from above 4x to around 3x
over the coming years.  This combination will, we believe, allow us to
deliver a compelling combination of revenues growing faster than the market,
profits growing faster than revenues, and returns to shareholders growing
faster than profits.

 

New medium-term financial targets*:

                                    Target
 Revenue growth                     ~4-6%                       Twice as fast as the market
 Margin                             ~5-6%                       50-100 bps of margin accretion
 Trading profit growth              Faster than revenue growth  Due to margin accretion
 Trading cash conversion            >80%
 Growth in shareholder returns      Faster than profits         Dividend cover to reduce from >4x-3x

 

* We base our medium-term targets on our estimated outturn for 2022, in order
to exclude the distorting impact on revenues and profits of Covid-19, which we
expect to be much smaller in 2022 than in 2021.

 

The event will be webcast on www.serco.com/investors
(http://www.serco.com/investors) and interested parties can pre-register at
www.serco.com/investors/capital-markets-day-2021
(http://www.serco.com/investors/capital-markets-day-2021) .

 

 

Rupert Soames, Group Chief Executive said: "We are ending 2021 on a high note,
having delivered a very strong operational and financial performance, despite
all the challenges we faced during the year.  For all our sakes we hope that
2022 will see sharply reduced need for government spending on Covid-related
services, and this will reduce revenues and profits in 2022; however, our
strong order intake in 2021 means that we expect to deliver good growth in
those parts of our business not involved with Covid-19 services.

 

"At our Capital Markets Event this afternoon we will show investors why we
expect the market for government services to continue to be robust, and, from
2022 onwards, how our strong and differentiated position will enable us to
grow our revenues faster than the market, our profits faster than our
revenues, and our returns to shareholders faster than profits.  We think that
will be a pretty compelling formula."

 

 

 

 

Guidance for 2021 and 2022

 

Expected outcome for 2021

The business has performed extremely well in 2021, and we reiterate our full
year guidance stated on 15 November, which means we expect to deliver revenue
of £4.4bn, growth of around 13%, and Underlying Trading Profit of not less
than £225m, growth of around 40%.  Pleasingly, we expect to end 2021 with a
pipeline of new opportunities ahead of June 2021.

 

Outlook for 2022

Although predicting the outcome for our Covid-19 related work is difficult due
to the speed of change with the pandemic, we expect a rapid wind-down of
Covid-19 related services supplied to governments during the first half of
2022, and this will have a significant impact on both revenue and profits in
2022.  However, a large part of this reduction will be offset by growth of
around 5% in other parts of the business as a result of the very strong order
intake in 2021.  This guidance is consistent with indications we gave in our
trading statement on 15 November and is in line with analysts' consensus for
Revenue and Underlying Trading Profit*.

Revenue in 2022 is expected to be £4.1bn-£4.2bn, approximately 6% lower than
the £4.4bn expected outturn for 2021.  This assumes a 1% contribution from
acquisitions and a 1% favourable impact from currency.  We expect lower
demand for Covid-19 related services in 2022 to reduce our revenue by
approximately 13%, with organic growth on non-Covid work to be around 5%,
in-line with our new medium-term growth targets.

 

Underlying Trading Profit (UTP) in 2022 is expected to be around £195m.  As
well as the impact of reduced Covid-19 revenues noted above, UTP will be
reduced by the ending of the AWE and Dubai Metro contracts; we also expect the
recently announced 1.25% increase in National Insurance employers'
contributions in the UK to cost around £5 million on an annualised basis.
 The impact of these factors is cushioned by the positive effect of new work
secured in 2021, such as the DWP Restart Programme and the Defence
Infrastructure Organisation contracts moving into profitability, as well as
the ending of our accelerated investment programme, and the beneficial impact
of the efficiencies we will derive from these investments in 2022.  In terms
of wider cost increases, the business has robust mitigation of the impact of
inflation as the great majority of contracts have either indexation provisions
or the ability to re-price work orders at the time they are contracted.

 

Net finance costs and tax: Net finance costs are expected to be around £25m,
slightly lower than 2021.  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: Free cash flow is expected to remain strong at around
£100m, lower than 2021 reflecting the reduced profitability and more normal
working capital absorption following the reduction of Covid-19 services which
had beneficial payment terms. We expect Adjusted Net Debt to end the year at
around £160m.

 

Guidance for 2021 and 2022

 

                                    2020     2021                 2022

Actual
Unchanged guidance
Initial

guidance
 Revenue                            £3.9bn   ~£4.4bn              £4.1-£4.2bn
 Organic sales growth               16%      ~10%                 ~(8)%
 Underlying Trading Profit          £163m    ≥£225m               ~£195m
 Net Finance Costs                  £26m     ~£26m                ~£25m
 Underlying effective tax rate      23%      ~25%                 ~25%
 Free Cash Flow                     £135m    ~£150m               ~£100m
 Adjusted Net Debt                  £58m     ~£220m               ~£160m

  Notes: The guidance uses an average GBP:USD exchange rate of 1.38 in 2021,
1.34 in 2022 and GBP:AUD of 1.83 in 2021, 1.84 in 2022.

 

*Serco-compiled consensus is £4.2bn of revenue and £196m of Underlying
Trading Profit, Bloomberg consensus is £4.2bn of revenue and £193m of
Underlying Trading Profit, as at 29 November 2021.

 

Ends

 

For further information please contact:

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

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

 

About Serco

Serco is a leading international 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 (http://www.serco.com)

 

LEI: 549300PT2CIHYN5GWJ21

 

 

Cautionary statement

This announcement does not constitute or form part of any offer or invitation
to sell, or any solicitation of any offer to purchase any shares or other
securities in Serco nor shall it or any part of it or the fact of its
distribution form the basis of, or be relied on in connection with, any
contract or commitment or investment decisions relating thereto, nor does it
constitute a recommendation regarding the shares or other securities of Serco.
Statements in this announcement reflect the knowledge and information
available at the time of its preparation.

 

Without prejudice to that, 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.  Accordingly, undue reliance should not be placed on the
forward-looking statements.

 

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,
including 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.

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