Revenue and earnings take a dip at Serco

Revenue at Serco fell slightly in the first half to £1.51bn from £1.52bn, it said on Thursday, although its reported revenue from continuing operations only rose to £1.51bn from £1.49bn.

The FTSE 250 group said its underlying trading profit fell to £35.3m from £50.6m year-on-year for the six months to 30 June, while its reported operating profit after exceptional items, from continuing operations only, plummeted to £21.7m from £64.8m a year ago

Basic underlying earnings per share were 1.55p, compared to 3.3p at the same time in 2016, and its basic reported earnings per share after exceptional items, continuing and discontinued operations, were a loss of 1.68p compared to 4.27p earnings in the six months to 30 June 2016.

Free cash flow was a negative £26.8m, widening from the negative £22.5m a year ago, while its net debts - including that for assets and liabilities held for sale - rose significantly to £148.9m from £99.7m.

“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,” said group chief executive Rupert Soames.

The board said first half 2017 profits and earnings had “challenging comparators” due to first half profits in 2016 benefiting from £11m of non-recurring trading items within UTP, such as commercial arrangements negotiated as part of contract closure, and £21m of non-underlying items within trading profit and reported operating profit, predominantly onerous contract provision releases.

In addition, the board said reported EPS reflected 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.

“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,” Soames explained.

“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.”

On the operational front, the company said its order intake increased “substantially” to £2.4bn from £0.9bn, including Serco’s largest ever contract at £1.5bn for the Grafton prison in Australia.

Together with £1.6bn booked in the second half of 2016, order intake over last 12 months of £4bn was the largest since 2012, the board said, and represented a book-to-bill ratio of around 130%.

Closing order book increased to £10.8bn, up by over £1bn year-on-year.

The board’s guidance for 2017 remained unchanged, with revenue tipped to be £3.1bn along with underlying trading profit of between £65m and £70m.

Serco said the movement in currency since its February statement could - if sustained - have a “small” negative effect.

“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,” Rupert Soames added.