Capital Markets Event to set out new medium-term targets. Initial guidance published for 2022.

2 December 2021

Serco will host a Capital Markets Event at 2pm UK time today, providing an update on strategy and outlining new medium-term targets, which are described below.  We also reiterate previous guidance for the 2021 financial year and give initial guidance for 2022, which is in-line with analysts' consensus*.

Capital Markets Event

At today's event there will be presentations from group and regional management.  We will describe how Serco has been transformed since 2014 from a collection of unrelated commercial and government contracts generating poor returns into a focused government services platform delivering strong growth and returns on capital of over 20%.  

Serco now enjoys a strong and differentiated position in the market, and our Business-to-Government (B2G) platform gives us a unique combination of agility, sector breadth, international reach, resilience and efficiency, to which we have added an effective M&A capability.

Since 2017, this has delivered a 50% increase in revenue, and compound annual growth in Underlying Trading Profit of 34% (£69m in 2017 to at least £225m in 2021).  In the same period, our order book has grown from £11bn to over £14bn with a book-to-bill ratio of around 120% and trading cash flow has increased ten-fold.  The balance sheet has been strengthened significantly with financial leverage expected to be below 1x net debt:EBITDA at the year end, despite making six acquisitions in the last four years.

Looking forward, we expect our addressable market to grow at 2-3% per year over the medium-term, and believe that on average we can grow our revenues at twice that rate (4-6%) from a base year of 2022; furthermore we expect our B2G platform to help us improve our margins by 50-100 bps to 5-6%, and to convert at least 80% of our operating profit into cash.  Given our strong financial position, we intend to reduce our dividend cover from above 4x to around 3x over the coming years.  This combination will, we believe, allow us to deliver a compelling combination of revenues growing faster than the market, profits growing faster than revenues, and returns to shareholders growing faster than profits.

New medium-term financial targets*:

* We base our medium-term targets on our estimated outturn for 2022, in order to exclude the distorting impact on revenues and profits of Covid-19, which we expect to be much smaller in 2022 than in 2021.

The event will be webcast on www.serco.com/investors and interested parties can pre-register at www.serco.com/investors/capital-markets-day-2021.

Rupert Soames, Group Chief Executive said: "We are ending 2021 on a high note, having delivered a very strong operational and financial performance, despite all the challenges we faced during the year.  For all our sakes we hope that 2022 will see sharply reduced need for government spending on Covid-related services, and this will reduce revenues and profits in 2022; however, our strong order intake in 2021 means that we expect to deliver good growth in those parts of our business not involved with Covid-19 services.

"At our Capital Markets Event this afternoon we will show investors why we expect the market for government services to continue to be robust, and, from 2022 onwards, how our strong and differentiated position will enable us to grow our revenues faster than the market, our profits faster than our revenues, and our returns to shareholders faster than profits.  We think that will be a pretty compelling formula."

Guidance for 2021 and 2022

Expected outcome for 2021

The business has performed extremely well in 2021, and we reiterate our full year guidance stated on 15 November, which means we expect to deliver revenue of £4.4bn, growth of around 13%, and Underlying Trading Profit of not less than £225m, growth of around 40%.  Pleasingly, we expect to end 2021 with a pipeline of new opportunities ahead of June 2021.

Outlook for 2022

Although predicting the outcome for our Covid-19 related work is difficult due to the speed of change with the pandemic, we expect a rapid wind-down of Covid-19 related services supplied to governments during the first half of 2022, and this will have a significant impact on both revenue and profits in 2022.  However, a large part of this reduction will be offset by growth of around 5% in other parts of the business as a result of the very strong order intake in 2021.  This guidance is consistent with indications we gave in our trading statement on 15 November and is in line with analysts' consensus for Revenue and Underlying Trading Profit*.

Revenue in 2022 is expected to be £4.1bn-£4.2bn, approximately 6% lower than the £4.4bn expected outturn for 2021.  This assumes a 1% contribution from acquisitions and a 1% favourable impact from currency.  We expect lower demand for Covid-19 related services in 2022 to reduce our revenue by approximately 13%, with organic growth on non-Covid work to be around 5%, in-line with our new medium-term growth targets. 

Underlying Trading Profit (UTP) in 2022 is expected to be around £195m.  As well as the impact of reduced Covid-19 revenues noted above, UTP will be reduced by the ending of the AWE and Dubai Metro contracts; we also expect the recently announced 1.25% increase in National Insurance employers' contributions in the UK to cost around £5 million on an annualised basis.  The impact of these factors is cushioned by the positive effect of new work secured in 2021, such as the DWP Restart Programme and the Defence Infrastructure Organisation contracts moving into profitability, as well as the ending of our accelerated investment programme, and the beneficial impact of the efficiencies we will derive from these investments in 2022.  In terms of wider cost increases, the business has robust mitigation of the impact of inflation as the great majority of contracts have either indexation provisions or the ability to re-price work orders at the time they are contracted.

Net finance costs and tax: Net finance costs are expected to be around £25m, slightly lower than 2021.  The underlying effective tax rate is expected to continue at 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 expected to remain strong at around £100m, lower than 2021 reflecting the reduced profitability and more normal working capital absorption following the reduction of Covid-19 services which had beneficial payment terms. We expect Adjusted Net Debt to end the year at around £160m.

Guidance for 2021 and 2022

  Notes: The guidance uses an average GBP:USD exchange rate of 1.38 in 2021, 1.34 in 2022 and GBP:AUD of 1.83 in 2021, 1.84 in 2022.

*Serco-compiled consensus is £4.2bn of revenue and £196m of Underlying Trading Profit, Bloomberg consensus is £4.2bn of revenue and £193m of Underlying Trading Profit, as at 29 November 2021.

Ends

For further information please contact:

Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or email: paul.checketts@serco.com

Marcus De Ville, Head of Media Relations, tel: +44 (0) 7738 898 550 or email: marcus.deville@serco.com

About Serco

Serco is a leading international 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

LEI: 549300PT2CIHYN5GWJ21

Cautionary statement

This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in Serco nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of Serco. Statements in this announcement reflect the knowledge and information available at the time of its preparation.

Without prejudice to that, 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", "plan", "target", "goal", "ambition", "intend" 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; 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.  Accordingly, undue reliance should not be placed on the forward-looking statements.

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, including 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.