Serco Group PLC profits are now starting to grow

Serco Group PLC (LON:SRP), today announced half year results 2018.

Rupert Soames, Serco Group Chief Executive, said: “As foreseen in our five-year strategy, profits are now starting to grow, with Underlying Trading Profit having increased by 20% at constant currency in the first half. We have also seen a continuation of the strong order intake achieved in 2017, with contract awards so far in 2018 of some £1.6bn, around 80% of which is from customers outside the UK; this order intake delivers another period during which the book‑to‑bill ratio has exceeded 100%, and sees our order book increase to £11.0bn. The financial and order intake performance has been accompanied by strong operational delivery and effective implementation of our transformation programme. In addition we have also made progress with value-enhancing acquisitions; BTP has been integrated within our US defence business to deepen our satellite and radar capabilities, and we have now completed the transfer of all six Carillion hospital contracts which will materially increase the scale and profitability of our UK health facilities management business. Notwithstanding market conditions that remain less than ideal, particularly in the UK, we are responding appropriately and continue to make progress in line with our strategy.”

· Revenue(1) at constant currency was down 5.6%, comprising a 6.0% organic decline from net contract attrition, partially offset by a 0.4% net contribution from acquisitions. In addition there was an adverse currency impact of £57m or 3.8%, resulting in a 9.4% decline in revenue at reported currency.

· Order intake of £1.6bn, includes the rebid of our US health insurance eligibility contract and 16 other awards worth more than £10m; around 80% of order intake came from customers of our Americas, Middle East and AsPac divisions, with the remaining 20% from the UK & Europe. 70% of the order intake comprised existing work being rebid or extended, and 30% was new business.

· Book-to-bill ratio of close to 120%; closing order book increased to £11.0bn, up from £10.7bn at the start of the year; a further £0.7bn will be added following the Carillion contract transfers.

· Underlying Trading Profit(2) at constant currency increased by 20%, largely as a result of the successful implementation of our transformation plans; adverse currency impact of £3.2m or 9%, resulted in an 11% increase at reported currency. Margin increased to 2.8% (2017: 2.3%).

· Reported Operating Profit increased by 56% and includes a £7.8m release of Contract & Balance Sheet Review items, which is excluded from Underlying Trading Profit. Onerous Contract Provisions (OCPs) tracking to plan and liability now stands at £123m, down from £447m in 2014 and £168m at the start of the year.

· Pre‑exceptional tax costs of £11m (2017: £16m); net exceptional costs also lower at £11m (2017: £27m).

· Underlying EPS increased by 29%, reflecting the growth in Underlying Trading Profit, together with lower net finance costs and tax rate; Reported EPS, which includes the impact of the other non-underlying items and lower tax and exceptional costs, resulted in a profit per share of 1.32p (2017: loss per share of 1.77p).

· Free Cash Flow(4) outflow of £26m, similar to the comparable period; in addition, £24m cash exceptional costs, £15m net acquisition consideration and a £13m net foreign exchange and hedging impact led to a £79m increase in net debt. Leverage for covenant purposes of 1.75x, comfortably within our normal target range of 1-2x.

· Value-enhancing acquisitions: completed and integrated BTP Systems within our US defence business to deepen our satellite and radar capabilities; after the period end, completed the transfer of the six Carillion health facilities management contracts in the UK.

· Pipeline of larger new bid opportunities increased to £4.7bn, reflecting successfully reloading the pipeline with new opportunities to replace those removed on bid outcomes during the first half of the year.

· Consistent with the closed period update issued on 29 June, guidance for 2018 full year is revenue of £2.7-2.8bn and Underlying Trading Profit to grow to around £80m. For 2019, we expect revenues to be broadly flat in constant currency, and to see further good growth in Underlying Trading Profit. With the completion of the Carillion contract transactions in the second half, we expect accounting net debt at the end of 2018 to increase slightly from the June position and to be at the mid-to-upper end of our £200-250m guidance range, equivalent to leverage for covenant purposes of 1.5-2x.