Full year guidance increased following strong first half
29 June 2023
Serco today provides its scheduled closed period update of trading for the first six months of 2023, together with updated guidance for 2023 as a whole. Serco will be in a closed period between 3 July 2023 and publication of the results for the first half of 2023 on Thursday 3 August 2023.
Highlights of expected first half performance
| · | Revenue: reported growth of 13% expected with organic revenue growth of around 6%. |
| · | Underlying Trading Profit: expected to increase by 8% to at least £140m. |
| · | Strong financial position: adjusted net debt expected to be around £250m, after £90m share buyback completed in first half, leverage approximately 1x net debt to EBITDA. |
| · | Upgraded guidance for 2023: revenue and Underlying Trading Profit guidance increased by 4%. |
Commenting on today's update, Mark Irwin, Serco Group Chief Executive, said:
"We have had a strong start to the year, including robust demand for immigration services supported by the effective integration of ORS into our global platform, growth in defence services, and our successful rebid of the CMS contract. Governments around the world are increasingly looking to us to help them with the complex and difficult challenges they face and our enhanced focus on customers, colleagues and capabilities enables us to respond to their needs. This is driving growth in a number of areas of our international business and enables us to upgrade our guidance for the year."
Expected outcome for the first half of 2023 and guidance for the full year
Revenue: We expect revenue of around £2.5bn in the first half of 2023, 13% higher than the £2.2bn reported in the first half of 2022. Our organic revenue growth is expected to be in the region of 6%, acquisitions have contributed 5% and currency is expected to have added 2%. Revenue has increased, despite a drag of around £80m, or 4%, from Covid-related work which fully concluded in the first half of 2022. Across our international portfolio, we are seeing growth in the defence sector and particularly strong growth in the immigration sector.
Regionally, we expect organic revenue growth in the UK, supported by high demand for immigration services, the Americas, driven by case management volumes and defence services, and the Middle East, where our new advisory business unit is gaining traction. Asia-Pacific is anticipated to see lower revenue due to reductions in volume-variable work in parts of the immigration network and facilities management. ORS, the business we acquired in September 2022 to enter the European immigration services market, has traded ahead of expectations with robust underlying demand due to global migration patterns.
For the year as a whole, we are increasing our revenue guidance by around 4% to at least £4.8bn, which would be around 6% higher than the £4.5bn reported in 2022. We increase our guidance for organic revenue growth from flat to around 4%. Revenues in the second half are expected to be slightly lower than the first because of our CMS contract, which always has more workflow in the first half and moves into its new five-year contract agreement on 1 July, our exit from contracts as disclosed in our 2022 results, and the strengthening of sterling.
Underlying Trading Profit (UTP): We expect first half UTP of at least £140m, 8% higher than the £130m reported last year. Currency is expected to add 4%, leaving constant currency growth at 4%. Strong demand for immigration services and the ramp up of contracts signed in prior years more than offsets a 12% negative variance from Covid-related work as well as lower volumes in Asia-Pacific.
For the full year, we now expect UTP of around £245m, 3% higher than 2022 and a 4% upgrade to our prior guidance. Profit is expected to be lower in the second half than the first because of the usual workflow cadence of our CMS contract and the commencement of the new agreement, our previously disclosed contract exits, and the strengthening of sterling.
Since our initial guidance for 2023 was communicated on 15 December 2022, movements in currency rates have had an adverse effect on our estimated UTP of around £7m.
Financial position: We expect adjusted net debt to be around £250m at the end of June and leverage of around 1x net debt to EBITDA. Our £90m share buyback completed on 22 June and has reduced the number of shares in issue by 5%.
In the full year, we now expect free cash flow to be around £130m and Adjusted Net Debt to end the year at around £190m.
| Guidance | 2022 | 2023 | |
|
| Actual | Prior guidance | New guidance |
| Revenue | £4.5bn | At least £4.6bn | At least £4.8bn |
| Organic sales growth | (4%) | ~0% | ~4% |
| Underlying Trading Profit | £237m | ~£235m | ~£245m |
| Net finance costs | £20m | £25m | £25m |
| Underlying effective tax rate | 22% | 25% | 25% |
| Free Cash Flow | £159m | ~£120m | ~£130m |
| Adjusted Net Debt | £204m | ~£200m | ~£190m |
NB: The guidance uses an average GBP:USD exchange rate of 1.25 in 2023 and GBP:AUD of 1.86. We expect a weighted average number of shares in 2023 of 1,111m for basic EPS and 1,130m for diluted EPS.
Consolidation of profit measures
From the half year results onwards, we will be simplifying the Group's profit measures by removing Trading Profit and renaming Underlying Trading Profit (UTP) to Underlying Operating Profit. It will have no impact on guidance and the historic Underlying Operating Profit will be the same as the reported UTP.
The UTP definition was introduced in 2015 to exclude onerous contract provision (OCP) releases or charges, other Contract and Balance Sheet Review adjustments, depreciation and amortisation of assets held for sale, and some other one-time items. It was maintained to ensure that there was transparency outside the underlying results of large charges and releases from the portfolio of onerous contracts recorded in 2014. These definitions are no longer required as the Contract and Balance Sheet Adjustments recorded in 2014 are now at an insignificant level. In the future, no items will be recorded between UTP and Trading Profit, meaning the additional measure is no longer necessary.
Items excluded from Underlying Operating Profit will be the amortisation of intangibles arising on acquisition and exceptional items, which is consistent with the items currently excluded from Trading Profit.
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 an impact partner to the world's leading governments. We gain scale, expertise and deliver measurable positive impact 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
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LEI code: 549300PT2CIHYN5GWJ21
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