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Interim Results

Serco sales flat

03 August 2017 07:45

Serco said reported sales was broadly flat at £1,508m in the six months to 30 June.

This comprised a 7.6% organic decline from net contract attrition, offset by an 8.2% currency benefit.

Order intake increased substantially to £2.4bn (2016: £0.9bn), including our largest ever contract at £1.5bn for Grafton prison in Australia.

Together with £1.6bn booked in the second half of 2016, order intake over last 12 months of £4bn is the largest since 2012 and represents a book-to-bill ratio of around 130%. Closing order book increased to £10.8bn, up by over £1bn year-on-year.

As previously explained, H1 2017 profits and earnings have challenging comparators due to H1 2016 profits benefiting from:

- £11m of non-recurring trading items within UTP, such as commercial arrangements negotiated as part of contract closure;

- £21m of non-underlying items within Trading Profit and Reported Operating Profit, predominantly Onerous Contract Provision releases;

- In addition, Reported EPS reflects a £27m adverse year-on-year movement in non-cash deferred tax adjustments related to pension assets. The largest adjustment arose as a result of the purchase of a bulk annuity for Serco's main defined benefit scheme.

As a result of these factors, UTP declined against H1 2016 by £15m to £35m, but was slightly ahead of the £32m recorded for H2 2016; Reported Operating Profit declined by £43m; Underlying EPS declined 1.75p to 1.55p, and Reported EPS fell 5.95p to a loss of 1.68p.

Free Cash Flow of negative £27m includes £8m of unwind of our receivables financing facility; the utilisation is now £nil (2016: £30m). Cash outflow related to exceptional items was £20m.

Closing Net Debt increased by £40m during the period to £149m. Of the £49m increase in Net Debt during the last twelve months, £30m relates to fully unwinding the receivables financing facility.

Net Debt : EBITDA leverage of 1.4x remains well within our medium term target of 1-2x.

Continued progress reducing burden of loss-making contracts: OCP utilisation of £40m (2016: £47m); closing balance sheet liability now £180m (30 June 2016: £239m)

Operating costs reduced in proportion to the scale of underlying revenue reduction; we remain on track to achieve savings in our shared services and overheads of around £20m for the year, which would take the total savings achieved over the last three years to around £100m.

Pipeline of larger new bid opportunities now at £7.9bn, down £0.5bn, with an encouraging £1.5bn of new opportunities being promoted into the pipeline to partially offset the exceptionally strong order intake.

Guidance for 2017 unchanged - Revenue of £3.1bn and Underlying Trading Profit of between £65m and £70m; the movement in currency since our February statement may, if sustained, have a small negative effect.

CEO Rupert Soames said: "Notwithstanding the well-flagged decline in profits compared with the first half of 2016, trading in the first half of 2017 keeps us on track to achieve our expectations for the full year, and represents an improvement in Underlying Trading Profit on the second half of 2016.

"The most striking element is the order intake, which for two successive periods has been very strong, totalling some £4bn in the last twelve months, and we have succeeded in maintaining the pipeline at broadly similar levels despite strong order conversion.

"However, as we said in June, we remain sensibly cautious in the light of the political environment in several of our markets becoming markedly more unpredictable.

"We continue to make good progress implementing the 'Transformation' phase of our strategy, which includes further strengthening our service propositions, driving improvement in our capabilities, infrastructure and processes, as well as eking out further efficiencies from our cost base."

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