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Serco faces the Coronavirus crisis from a position of ‘relative strength’

Serco has provided an unscheduled update on its current trading and its approach to meeting the challenge of the Coronavirus.

The company has reported that although the financial results for March have not yet been consolidated, early indications are that Serco has had a strong first quarter for the 2020 financial year.

Organic revenue growth is likely to have been around 10 per cent, and underlying trading profit for the quarter is anticipated to be at or slightly ahead of its phased budget. Serco expects to have achieved a book-to-bill ratio of over 100 per cent as a result of order intake that included winning the Gatwick Immigration Removal Centre contract in the UK and signing the extension for Fiona Stanley Hospital in Australia.

Serco’s adjusted net debt was £215 million, and the Group had £508 million of committed credit facilities and committed headroom of £286 million. The Board considers Serco to be “conservatively financed” and the next material debt repayment is not until May 2021, for £49 million. Serco added it has “a high degree of visibility” of its revenues: at the start of the year the Group had an order book of over £14 billion and around 75 per cent of its anticipated 2020 revenues were in the order book.

Serco stated at this early stage of the crisis it is however “impossible to foresee with any reliability what overall impact the virus will have on our business”. Adding “to state the obvious, it all depends on how long the crisis lasts, and on the actions of our government customers, both of which are currently unknowable. Furthermore, with a book of around 500 contracts, each with its own particular terms and conditions, it will take some time to work out with our customers what opportunities and risks exist and what mitigation strategies are available. What is certain is that some contracts will deliver more profit, some less, but the net result of these ‘puts and takes’ is currently unknown”.

As a result Serco says it no longer regards the guidance it gave at the time of its results in late February as being reliable and is formally withdrawing it. Investors will be updated as soon as the business has a better-developed view of the likely outcome.

Elsewhere Serco claims it is taking initiatives to minimise operating costs on contracts where revenues are likely to be reduced, and, where practical, redeploying people between contracts which have spare resources and those which are stretched.

Serco is a Business-to-Government (B2G) business, providing essential support to governments in over 20 countries. Its annual results presentation provides analysis of revenues by geography and by sector, and in summary its 2019 revenues split as follows: the UK (45 per cent), the USA & Canada (25 per cent), Asia Pacific (17 per cent), the Middle East (10 per cent) and Europe (3 per cent); the services it provides to governments are in Defence (32 per cent), Justice & Immigration (16 per cent), Transport (16 per cent), Health (12 per cent) and Citizens Services (24 per cent).

Rupert Soames, Serco Group CEO, said: “Every crisis is different, and this crisis is no different. It presents business and logistical challenges, complexity and uncertainty, overlaid with illness, fear and dislocation to millions of peoples’ lives on a hitherto unseen scale.

“Serco faces the Coronavirus crisis from a position of relative strength, with a record order book, a solid balance sheet, plenty of liquidity and secured sources of funding. Our customers, being governments in over 20 countries, are determined to do whatever it takes to sustain public services and we expect to see continued demand for many, but not all, of our service lines.

“Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can to protect our employees from harm and our shareholders from loss. Profitability amongst our 500 contracts this year will be affected, some up, some down, and at this stage it is too early to tell how the overall result will net out. In the meantime, we will devote ourselves to doing whatever is required to support public services so that, when the crisis passes, our reputation amongst our customers will be enhanced and our operational capacity and capability will remain intact.

“Words cannot properly express the respect and admiration the conduct of our 55,000 employees deserve. They have stepped up to the challenges public services are facing with a level of commitment, energy and engagement which is extraordinary and proud-making. Sustaining vital public services puts many tens of thousands of Serco people on the front line in hospitals, prisons, trains, metros, refuse lorries, asylum seeker accommodation, tugs, ships, contact centres and sites of national strategic importance. They are addressing customer requirements and available resources which change by the hour and often mis-match, and all the while protecting their families and communities. Our mettle is being tested as never before, and we are determined to rise to the level of events.”

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