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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 GBP4.8bn in 2023, with reported
growth of around 7% and organic revenue growth of 4%.
-- Underlying operating profit: expected to be GBP245m, in line with
guidance.
-- Cash flow: now expect free cash flow of GBP170m, GBP20m better than
prior guidance, cash conversion of more than 90%.
-- Strong financial position : adjusted net debt expected to be GBP160m,
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 GBP260m, 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 EUR40m (GBP34m).
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 GBP4.8bn in 2023,
approximately 7% higher than the GBP4.5bn 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 GBP245m. This would represent an increase of 3%
compared to the GBP237m 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 GBP170m, 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 GBP160m, GBP10m better than previous
guidance of GBP170m, 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 GBP4.8bn At least GBP4.8bn GBP4.8bn
Organic sales growth 4% 4% (3)%
Underlying operating GBP260m
profit GBP245m GBP245m
Net finance costs GBP25m GBP25m GBP33m
Underlying effective
tax rate 23% 23% 25%
Free cash flow GBP150m GBP170m GBP140m
Adjusted net debt GBP170m GBP160m GBP85m
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 GBP246m in 2023 and GBP248m in 2024.
Acquisitions
Today we have also announced an agreement to acquire European
Homecare (EHC) for a consideration of EUR40m. 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 GBP4.8bn, similar to the
GBP4.8bn 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
GBP100m, 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 GBP260m, including an expected currency
drag of GBP5m, 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 GBP13m of mobilisation costs relating to these in 2024.
Net finance costs and tax: Net finance costs are expected to be
around GBP33m. 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 GBP140m 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 GBP85m, 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
Marcus De Ville, Head of Media Relations | +44 (0) 7738 898 550
| 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
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",
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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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