REG - Serco Group PLC - Guidance increased following strong first half

SercoAnnouncement

29/06/2023 07:00

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RNS Number : 3013E  Serco Group PLC  29 June 2023

Full year guidance increased following strong first half

 

29 June 2023

 

Serco today provides its scheduled closed period update of trading for the
first six months of 2023, together with updated guidance for 2023 as a whole.
 Serco will be in a closed period between 3 July 2023 and publication of the
results for the first half of 2023 on Thursday 3 August 2023.

 

Highlights of expected first half performance

 ·             Revenue: reported growth of 13% expected with organic revenue growth of around
               6%.
 ·             Underlying Trading Profit: expected to increase by 8% to at least £140m.
 ·             Strong financial position: adjusted net debt expected to be around £250m,
               after £90m share buyback completed in first half, leverage approximately 1x
               net debt to EBITDA.
 ·             Upgraded guidance for 2023: revenue and Underlying Trading Profit guidance
               increased by 4%.

 

Commenting on today's update, Mark Irwin, Serco Group Chief Executive, said:

 

"We have had a strong start to the year, including robust demand for
immigration services supported by the effective integration of ORS into our
global platform, growth in defence services, and our successful rebid of the
CMS contract.  Governments around the world are increasingly looking to us to
help them with the complex and difficult challenges they face and our enhanced
focus on customers, colleagues and capabilities enables us to respond to their
needs.  This is driving growth in a number of areas of our international
business and enables us to upgrade our guidance for the year."

 

Expected outcome for the first half of 2023 and guidance for the full year

 

Revenue: We expect revenue of around £2.5bn in the first half of 2023, 13%
higher than the £2.2bn reported in the first half of 2022.  Our organic
revenue growth is expected to be in the region of 6%, acquisitions have
contributed 5% and currency is expected to have added 2%.  Revenue has
increased, despite a drag of around £80m, or 4%, from Covid-related work
which fully concluded in the first half of 2022.  Across our international
portfolio, we are seeing growth in the defence sector and particularly strong
growth in the immigration sector.

 

Regionally, we expect organic revenue growth in the UK, supported by high
demand for immigration services, the Americas, driven by case management
volumes and defence services, and the Middle East, where our new advisory
business unit is gaining traction.  Asia-Pacific is anticipated to see lower
revenue due to reductions in volume-variable work in parts of the immigration
network and facilities management.  ORS, the business we acquired in
September 2022 to enter the European immigration services market, has traded
ahead of expectations with robust underlying demand due to global migration
patterns.

 

For the year as a whole, we are increasing our revenue guidance by around 4%
to at least £4.8bn, which would be around 6% higher than the £4.5bn reported
in 2022.  We increase our guidance for organic revenue growth from flat to
around 4%.  Revenues in the second half are expected to be slightly lower
than the first because of our CMS contract, which always has more workflow in
the first half and moves into its new five-year contract agreement on
    1 July, our exit from contracts as disclosed in our 2022 results, and
the strengthening of sterling.

 

Underlying Trading Profit (UTP): We expect first half UTP of at least £140m,
8% higher than the £130m reported last year.  Currency is expected to add
4%, leaving constant currency growth at 4%.  Strong demand for immigration
services and the ramp up of contracts signed in prior years more than offsets
a 12% negative variance from Covid-related work as well as lower volumes in
Asia-Pacific.

 

For the full year, we now expect UTP of around £245m, 3% higher than 2022 and
a 4% upgrade to our prior guidance.  Profit is expected to be lower in the
second half than the first because of the usual workflow cadence of our CMS
contract and the commencement of the new agreement, our previously disclosed
contract exits, and the strengthening of sterling.

 

Since our initial guidance for 2023 was communicated on 15 December 2022,
movements in currency rates have had an adverse effect on our estimated UTP of
around £7m.

 

Financial position: We expect adjusted net debt to be around £250m at the end
of June and leverage of around 1x net debt to EBITDA.  Our £90m share
buyback completed on 22 June and has reduced the number of shares in issue by
5%.

 

In the full year, we now expect free cash flow to be around £130m and
Adjusted Net Debt to end the year at around £190m.

 

 Guidance                       2022                          2023
                                Actual   Prior guidance           New guidance
 Revenue                        £4.5bn   At least £4.6bn          At least £4.8bn
 Organic sales growth           (4%)     ~0%                      ~4%
 Underlying Trading Profit      £237m    ~£235m                   ~£245m
 Net finance costs              £20m     £25m                     £25m
 Underlying effective tax rate  22%      25%                      25%
 Free Cash Flow                 £159m    ~£120m                   ~£130m
 Adjusted Net Debt              £204m    ~£200m                   ~£190m

 

NB: The guidance uses an average GBP:USD exchange rate of 1.25 in 2023 and
GBP:AUD of 1.86.  We expect a weighted average number of shares in 2023 of
1,111m for basic EPS and 1,130m for diluted EPS.

 

 

Consolidation of profit measures

From the half year results onwards, we will be simplifying the Group's profit
measures by removing Trading Profit and renaming Underlying Trading Profit
(UTP) to Underlying Operating Profit.  It will have no impact on guidance and
the historic Underlying Operating Profit will be the same as the reported UTP.

 

The UTP definition was introduced in 2015 to exclude onerous contract
provision (OCP) releases or charges, other Contract and Balance Sheet Review
adjustments, depreciation and amortisation of assets held for sale, and some
other one-time items.  It was maintained to ensure that there was
transparency outside the underlying results of large charges and releases from
the portfolio of onerous contracts recorded in 2014.  These definitions are
no longer required as the Contract and Balance Sheet Adjustments recorded in
2014 are now at an insignificant level.  In the future, no items will be
recorded between UTP and Trading Profit, meaning the additional measure is no
longer necessary.

 

Items excluded from Underlying Operating Profit will be the amortisation of
intangibles arising on acquisition and exceptional items, which is consistent
with the items currently excluded from Trading Profit.

 

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 an impact partner to the world's leading governments.  We gain
scale, expertise and deliver measurable positive impact 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)

 

 

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.

 

LEI code: 549300PT2CIHYN5GWJ21

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