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2018 marks an ‘inflection point’ for Serco

In its full year results 2018 Serco has announced revenue at constant currency declined 5.6 per cent in the first half of the year, but grew 2.5 per cent in the second half, resulting in a decline for the full year of 1.7 per cent.

The support services group says the figure comprises a 3.1 per cent organic decline from net contract attrition, partially offset by a 1.4 per cent net contribution from acquisitions. The adverse impact of currency in the full year was £65 million, or 2.2 per cent, resulting in a 3.9 per cent decline in revenue at reported currency.

Underlying trading profit at constant currency increased by 40 per cent as a result of a strong operating performance, further good progress on transformation savings and other cost efficiencies, as well as £10 million of non‑recurring trading items such as end-of-contract settlements.  There was an adverse currency impact of £4.0 million or 6 per cent, resulting in a 34 per cent increase at reported currency.

Reported operating profit increased nearly fourfold, and includes a £23.6 million net credit from Contract & Balance Sheet Review items (2017: net charge of £24.2 million) offset by a net charge for exceptional items of £31.9 million (2017: net charge of £19.6 million), neither of which are included in Underlying Trading Profit.

Net debt increased by £47 million (2017: £32 million).

Order intake of £2.9 billion was from customers of Serco’s Americas, Middle East, AsPac and continental European operations, with the remaining 20 per cent from the UK.  Sixty-six per cent of the order intake comprised existing work being rebid or extended, and 34 per cent was new business.  The largest award was the rebid of  Serco’s US health insurance eligibility contract valued at around £700 million, with over 40 other awards worth more than £10 million.

Serco’s order book increased to £12.billion, up from £10.7 billion a year earlier; the increase includes the strong order intake together with £0.7 billion added via the acquisition of the Carillion health facilities management contracts and an adjustment to the definition to align with IFRS15 future contractual revenue.

The Group also saw its pipeline of larger new bid opportunities increase by £0.9 billion to £5.3 billion at 31 December 2018; the £2.5 billion of contract awards in January and February 2019 for AASC and NGHS have the effect of reducing the pipeline by £1.7 billion.

Speaking about the annual results, Rupert Soames, Serco Group Chief Executive, said: “2018 marked an inflection point for Serco. After several years of declining revenues and profits, Underlying Trading Profit at constant currency rose 40 per cent, Reported Operating Profit grew fourfold and Revenue started to grow again in the second half. Underlying Earnings per Share (EPS) grew by 63 p-er cent, Reported EPS was positive for the first time since 2013, and Free Cash Flow also turned positive for the first time since 2014.

“Our balance sheet remains strong, with Net Debt : EBITDA for covenant purposes at 1.1x, down from 1.4x in 2017; our pension schemes are well funded; there was no use of working capital finance facilities; we pay our suppliers on average in 30 days and our customers pay us on average in 29 days; and we have recently successfully completed the refinancing of a £250m banking facility committed to December 2023, on terms similar to previous arrangements.

“Strong order intake gave us a book-to-bill ratio of over 100 p-er cent for the second year in a row, and in addition the acquisition of the Carillion health contracts contributed to our order book growing to £12 billion at the end of 2018, an increase of around 20 per cent since 2016.

“Also for the second year in a row, and reflecting the Group’s broad international footprint, 80 per cent of our order intake in 2018 came from outside the UK. Our confidence has been further bolstered by the signing in the first six weeks of 2019 of two very large contracts: AASC – asylum accommodation and support services in the UK valued at £1.9 billion, and NGHS – defence healthcare provision in Australia valued at £0.6 billion.

Looking ahead, Soames added: “We expect to deliver further progress in 2019, with Revenue and Underlying Trading Profit both expected to grow.

“Beyond 2019, and consistent with our strategy announced in 2015, we believe we will able to continue to improve our margins, with a target of achieving 5 per cent or above in the longer term. In terms of demand, we now believe that the weighted growth rate across all our geographies and sectors has slowed from the 5-7 per cent seen in 2010-2014 to around 2-3 per cent now; whilst demand in some markets – for example US defence – remains robust, conditions in the UK, which represents about 40 per cent of our revenues, are weak and this is acting as a drag to aggregate market growth.

“Despite this, our recent strong order intake means that we believe we should be able to outperform a weaker market in the next few years, absent unforeseen headwinds or major rebid losses. We expect Serco to achieve revenue growth of 3-4 per cent in 2019, accelerating to around 5 per cent in 2020 as contracts such as Grafton, Icebreaker, AASC and NGHS become fully operational.”

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