REG - Serco Group PLC - Pre-close trading update

SercoAnnouncement

14/12/2023 07:15

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RNS Number : 7172W  Serco Group PLC  14 December 2023

Pre-close trading update; Strong execution in 2023, profit growth in 2024

14 December 2023

 

Serco today provides its scheduled trading update for 2023, an initial outlook
for 2024 and re-iterates medium-term targets.

 

Highlights

 ·             Revenue: expected to be at least £4.8bn in 2023, with reported growth of
               around 7% and organic revenue growth of 4%.
 ·             Underlying operating profit: expected to be £245m, in line with guidance.
 ·             Cash flow: now expect free cash flow of £170m, £20m better than prior
               guidance, cash conversion of more than 90%.
 ·             Strong financial position: adjusted net debt expected to be £160m, leverage
               approximately 0.7x net debt to EBITDA, leading to significant surplus capital
               at year end.
 ·             Initial guidance for 2024: underlying operating profit expected to increase to
               around £260m, as growth in underlying business and contribution from
               acquisitions more than offset currency headwind and mobilisation costs from
               recent new business wins.
 ·             Acquisition of European Homecare for €40m (£34m).

 

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

 

"Our strong focus on execution has delivered good performance in the second
half, resulting in full year outcomes that are better than those expected when
we initially laid out guidance.

 

For 2023, we will deliver growth in revenue, profit and cash, as well as an
improvement in colleague safety and strengthened operational delivery of
services to our customers.  We have also announced two strategic
acquisitions, European Homecare, to accelerate growth in our immigration
services portfolio, and Climatize, to deepen our advisory expertise in
sustainable developments and operations.  We expect to enter 2024 with a
strong pipeline of new business opportunities and a robust balance sheet.

 

As I approach the end of my first year leading Serco, I am encouraged by our
progress, inspired by the commitment of my colleagues, grateful for the
support of our shareholders and confident about our growth potential over the
medium term."

 

Expected outcome for 2023

 

Revenue: We expect revenue to be at least £4.8bn in 2023, approximately 7%
higher than the £4.5bn reported in 2022.  Organic revenue growth, which we
originally expected to be flat in 2023, has been good and should be in the
region of 4%.  Acquisitions, namely ORS, our European immigration services
provider acquired in 2022, will contribute 3% and currency is expected to be a
drag of 1%.  Revenue has increased organically as growth in the immigration
and defence sectors, areas we have invested in significantly in recent years,
more than offset Covid-related work.  Were revenue from our joint ventures to
be included, it would add an estimated further 5% to the Group's organic
revenue growth, as our VIVO Defence Services work for the UK's Defence
Infrastructure Organisation continues to experience robust demand.

 

The second half is expected to see organic revenue growth of 2%.  This
moderated as expected from the 6% level seen in the first half as our CMS
contract moved into its new five-year contract agreement, immigration volume
growth eased in the UK, and we exited, as previously announced, certain
low-margin contracts in the UK in the health facilities management and
transport sectors.

 

Underlying operating profit: We expect underlying operating profit of around
£245m.  This would represent an increase of 3% compared to the £237m
reported in 2022.  Ongoing demand for immigration services in the UK and
Europe, operational improvement in our existing portfolio, as well as the
successful ramp up of new business signed in prior years, has more than offset
a 7% impact from Covid-related work as well as lower volumes in Asia-Pacific.

 

Financial position: we now expect free cash flow will be better and financial
leverage lower than prior guidance.  Free cash flow is expected to be £170m,
as the business continues to deliver strong conversion of profit to cash.
This means free cash flow will be more than 40% better than we expected at the
start of the year, with cash conversion above 90%.  Adjusted net debt is
expected to end the year at around £160m, £10m better than previous guidance
of £170m, leaving net debt to EBITDA at around 0.7x.  We therefore expect to
again have significant surplus capital at the end of the year.

 

 Guidance for 2023 and 2024     2023                                2024
                                Prior guidance    New guidance      Initial guidance
 Revenue                        At least £4.8bn   At least £4.8bn   ~£4.8bn
 Organic sales growth           ~4%               ~4%               ~(3)%
 Underlying operating profit    ~£245m            ~£245m            ~£260m
 Net finance costs              £25m              £25m              ~£33m
 Underlying effective tax rate  23%               23%               ~25%
 Free cash flow                 ~£150m            ~£170m            ~£140m
 Adjusted net debt              ~£170m            ~£160m            ~£85m

 

NB: The guidance uses an average GBP:USD exchange rate of 1.24 in 2023, 1.26
in 2024 and GBP:AUD of 1.87 in 2023, 1.92 in 2024, which is based on currency
rates as 30 November 2023.  We expect a weighted average number of shares for
basic EPS of 1,111m in 2023, 1,100m in 2024 and for diluted EPS 1,130m in
2023, 1,115m in 2024.  Guidance includes EHC acquisition with the
consideration paid in 2024.

Company-compiled analyst consensus for underlying operating profit is £246m
in 2023 and £248m in 2024.

 

Acquisitions

Today we have also announced an agreement to acquire European Homecare (EHC)
for a consideration of €40m.  EHC is a leading private provider of
immigration services in Germany.  In conjunction with ORS, the Swiss-based
business we acquired in 2022, this strategic acquisition will create a strong
partner for European governments in immigration services and complement the
support we already provide to government customers in the UK and Australia.

 

We have also agreed to acquire Climatize, a small but fast-growing business
that operates in the United Arab Emirates and the Kingdom of Saudi Arabia
offering 'zero-carbon' advisory and related engineering services.  The
business will significantly boost Serco's sustainability advisory capability
in the Middle East with possible scalability across the Group.

 

Both acquisitions are expected to complete in the first quarter of 2024.

 

Outlook for 2024

Our initial outlook for 2024 anticipates revenue will be similar to 2023,
underlying operating profit will grow by around 6% and the conversion of
profit to cash will continue to be consistent with our target of at least
80%.  Our pipeline of new business opportunities is expected to be strong as
we enter 2024.

 

Revenue: We expect revenue to be around £4.8bn, similar to the £4.8bn
expected outturn for 2023, with a 3% organic contraction, a 2% contribution
from acquisitions and a 1% adverse impact of currency.  Revenue is expected
to be lower organically due to our CMS contract now being in its new five-year
agreement, the annualisation of our previously announced exit from certain
low-margin contracts, and contract mix change in immigration, as we support
the UK Government's efforts to reduce the number of asylum seekers being
accommodated in hotels.  These factors will be partially offset by increased
contribution from newer contracts ramping up, new business and growth in the
existing portfolio.  EHC, the leading provider of immigration services in
Germany we have agreed to acquire, is expected to contribute revenue of around
£100m, subject to competition authority clearance being received and the
transaction completing by the end of the first quarter.

 

Underlying operating profit: Underlying operating profit is expected to grow
by 6% to £260m, including an expected currency drag of £5m, with good
progress on margins.  The year will benefit from new contracts ramping up,
operational efficiency improvements across the existing portfolio and a
contribution from acquisitions.  We expect these to more than offset the
mobilisation costs on new work, lower immigration volumes in the UK and
Australia, and CMS operating in its new contract term.  Following our success
in winning the Functional Assessment Services contract and electronic
monitoring contracts in the UK in the fourth quarter, we expect around £13m
of mobilisation costs relating to these in 2024.

 

Net finance costs and tax: Net finance costs are expected to be around
£33m.  This is more than 2023 due to higher interest rates, increased volume
of lease-related interest and acquisition spend.  The underlying effective
tax rate is expected to be 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 again expected to be strong at around
£140m in the year, consistent with our ongoing expectation of converting at
least 80% of profit into cash.  This is below 2023, which included the
benefit of actions taken to structurally improve our working capital.  We
expect adjusted net debt to end the year at around £85m, including the
acquisitions of EHC and Climatize, but before any potential share buybacks.

 

Outlook for growth in the medium-term

Our expectation remains, as previously laid out, that the business will grow
revenues at an average of 4-6% a year over the medium term and profits will
grow faster than that, as governments, more than ever, look to the innovation,
efficiency and skilled operational management that partnership with Serco can
bring to their most pressing challenges.

 

Ends.

 

For further information, please contact:

 

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

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

 

About Serco

Serco brings together the right people, the right technology and the right
partners to create innovative solutions that make a positive impact and
address some of the most urgent and complex challenges facing the modern
world.

 

With a primary focus on serving governments globally, Serco's services are
powered by more 50,000 people working across defence, space, migration,
justice, healthcare, mobility and customer services.

 

Serco's core capabilities include service design and advisory, resourcing,
complex programme management, systems integration, case management,
engineering, and asset & facilities management.

 

Underpinned by Serco's unique operating model, Serco drives innovation and
supports customers from service discovery through to delivery.

 

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" or, in
each case, their negative or other variations or comparable terminology
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
(including under the UK Listing Rules and the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority), 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: 549300PT2CIHYN5GWJ21

 

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