TIDMSRP
RNS Number : 3608K
Serco Group PLC
13 December 2018
Closed period update
13 December 2018
Serco Group plc
LEI: 549300PT2CIHYN5GWJ21
Underlying Trading Profit to grow 30-40% in 2018, and to grow in
line with consensus for 2019; upgrade to EPS forecasts for both
2018 and 2019; lower than expected leverage and net debt; continued
strong order intake and a growing order book; successfully
completed refinancing of banking facilities.
Serco Group plc ('Serco' or 'the Group'), the international
service company, today provides its scheduled update on financial
performance for 2018 and for the outlook for 2019. Serco will be in
a closed period between 1 January 2019 and publication of the
results for the 2018 financial year on Thursday 21 February 2019.
Serco will be holding meetings with analysts today, during which no
additional material information will be disclosed.
Highlights
-- 2018 Underlying Trading Profit to grow 30-40% to be within
the range of GBP90-95m, an outcome in line with guidance that was
revised upwards in late September; closing net debt to be lower
than previously expected at around GBP200m, with leverage improving
to 1.2-1.3x.
-- 2019 outlook in line with market expectations of continued
progress; this includes revenue of GBP2.8-2.9bn and Underlying
Trading Profit growth of mid-single digits to be within the range
of GBP95-100m.
-- Underlying EPS for both 2018 and 2019 likely to be a further
5-10% ahead of current consensus, principally as a result of a
lower effective tax rate.
-- GBP250m of Revolving Credit Facility with banking syndicate renewed for five years on terms substantially unchanged.
Commenting on today's update, Rupert Soames, Serco Group Chief
Executive, said: "As we predicted when we set out our five-year
strategy in 2015, profits have grown strongly in 2018 with margins
increasing as a result of improved operational performance and cost
reduction. With revenues no longer reducing, cash generation
turning positive and the benefit of a strong balance sheet, we are
pleased with progress, and we expect further improvement in 2019.
We expect to deliver another year of strong order intake in 2018,
driven in particular by our international businesses, and our
operations and transformation plans continue to deliver an
organisation which is leaner, fitter and much stronger."
Outcome for 2018
As highlighted in our unscheduled trading update issued on 28
September 2018, trading in the second half of the year has been
better than we anticipated at the start of the year. In part, this
has reflected a strong operating performance, together with good
progress on transformation savings and other cost efficiencies. In
addition, there have been a number of non-recurring trading items
such as end-of-contract settlements and other commercial
negotiations. We continue to expect Underlying Trading Profit
within the range of GBP90-95m; this represents a significant
improvement over the GBP80m we expected at the start of the year,
and would represent growth of some 30-40% on the result for 2017 of
GBP69.3m. As anticipated, we expect to report revenue for the year
of around GBP2.8bn, representing a reduction of approximately 4% on
2017; after a 6% decline in the first half, we expect revenue in
the second half of the year to be broadly flat on an organic basis,
and growing if the contribution from acquisitions is included.
Underlying net finance costs guidance is unchanged at GBP13-14m.
The underlying effective tax rate is now expected to come down
towards 25%, which reflects the improvement in and mix of the
Group's profitability. The weighted average number of shares for
basic EPS purposes is broadly unchanged at 1.1bn. Underlying basic
EPS is expected to be in a range of 5.0 to 5.5p.
Net debt at the end of the year is likely to be around GBP200m,
lower than previous guidance, and we expect to achieve positive
Free Cash Flow in 2018 after three years of outflows. Underlying
leverage is anticipated to be 1.2-1.3x, and lower on a covenant
basis.
Through to the end of October 2018, the Group's order intake
totalled GBP2.5bn, compared to revenues of about GBP2.3bn. Whilst
it is difficult to predict the precise timing of customers'
decisions, we are hopeful that we will achieve a book-to-bill ratio
for the year of around 100% or greater, as we did in 2017. Given
the difficulties in our markets in the UK, we think this would be a
robust performance, underlining the importance of our strong
position internationally. Together with the acquisition of the
Carillion health facilities management contracts, we also expect to
see significant growth in our order book.
Outlook for 2019
As stated in the September update, 2019 will not benefit from
the non-recurring trading items that have formed part of the very
strong profit growth delivered in 2018. However, having recently
completed our detailed budget process, we anticipate continued
progress in 2019. We expect revenue of GBP2.8-2.9bn, which includes
the potential for modest growth in organic terms, together with the
annualised contribution of recent acquisitions, principally the UK
health facilities management contracts from Carillion. We expect
Underlying Trading Profit in the range of GBP95-100m, in line with
current market consensus; within this we expect declines in the
profitability of some contracts in the Middle East, most notably on
the MELABS contract, but we also expect these declines to be more
than offset by progress elsewhere across the Group, notably by
strong growth in the profits delivered by our UK Healthcare
business as a consequence of our acquisition of the Carillion
contracts, and by further transformation savings and
efficiencies.
As previously indicated, underlying net finance costs are
expected to increase principally as a result of an approximate
GBP3m net reduction in investment revenue following the early
repayment in October 2018 of the vendor loan note issued on our
disposal of Intelenet in 2015. The underlying effective tax rate is
expected to reduce to below 25% in 2019 as a result of improving
profitability in the UK business.
A further improvement in Free Cash Flow is anticipated in 2019.
The overall Movement in Net Debt is expected to be a modest
outflow.
As we have clearly expressed in the past, in every year there
remains a wide range of potential outcomes reflecting the
sensitivity of our profits to even small changes in revenues and
costs. There is also sensitivity to currency rates during the year,
with our guidance based upon recent currency rates prevailing
throughout 2019, which, given recent weakening of sterling, implies
a modest favourable impact when compared to the average rates for
2018.
All guidance stated above for 2019 is on a pre-IFRS16 basis.
This new accounting standard for leases is effective for the Group
from 1 January 2019; the quantitative impact of adoption is in the
final stages of assessment and our estimates will be disclosed at
the time of reporting the financial results for 2018. The standard
will result in an operating lease expense now being reclassified to
finance costs and depreciation, which will reflect the
corresponding lease liabilities and right of use assets that will
now be recognised on the balance sheet. The increases to Underlying
Trading Profit and net finance costs will broadly net out (and will
fully net out over the life of each lease); we expect the impact on
Profit Before Tax, on the basis of our current book of business, to
be immaterial. There is no cash flow impact, with reclassifications
between operating and financing cash flows fully netting out. There
is no covenant impact, with the Group's financing facilities
continuing to be calculated under the prior standard, IAS17.
Refinancing of Revolving Credit Facility (RCF) completed
Serco's RCF provides funds for general corporate and working
capital purposes, and the ability to issue bonds to support the
Group's business needs. The previous facility of GBP368m was due to
mature in April 2020. The refinancing of the facility has recently
been successfully completed with a syndicate of banks and provides
GBP250m of committed funding for five years; the lower amount
reflects the much reduced need for debt in the business. The terms
and conditions of the new facility are substantially unchanged from
the prior facility. The RCF was undrawn at 31 December 2017 and is
anticipated to be undrawn at 31 December 2018. The Group has not
utilised any factoring or other working capital facilities during
2018. The Group's other committed funding consists of approximately
GBP245m of US private placement notes with maturities out to 2024.
The Group's committed credit facility headroom is considered more
than sufficient to meet the expected requirements of the
business.
Ends
For further information please contact Serco:
Stuart Ford, Head of Investor Relations T +44 (0) 7738 894
788
Marcus De Ville, Head of Media Relations T +44 (0) 7738 898
550
About Serco
Serco is a leading 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
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", "should", "will", "aspire", "aim", "plan",
"target", "goal", "ambition" 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; and
cyber-attacks. 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.
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END
MSCGGGUAPUPRUQW
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