Serco confident in outlook after 2017 struggles

Outsourcing giant Serco confirmed a 2% slide in reported revenue to £2.95bn in its 2017 results on Thursday, which it said comprised a 6% organic decline from net contract attrition, partially offset by a 4% currency benefit.

The FTSE 250 company said order intake was up 36% at £3.4bn, including Grafton prison in Australia - which was the group's largest ever contract win - and more than 30 other contract awards worth more than £10m each across the UK, Europe, America and the Middle East.

It reported a book-to-bill ratio of over 100% for the first time since 2012, with its closing order book at £10.7bn, up from £9.9bn a year earlier.

Underlying trading profit was said to be at the top end of the board’s guidance given at the start of 2017, with its run-rate throughout 2017 approximately 10% ahead of that achieved in the second half of 2016.

Serco’s underlying trading profit stood at £69.8m for the 12 months to 31 December, down from £82.1m in the prior year.

The company said its operating costs were reduced in proportion to the scale of revenue reduction, with further shared services and overhead savings of around £20m achieved, taking total overhead savings over the last three years to over £100m.

Its reported result included a £16m net charge of contract and balance sheet review adjustments, compared to a net release of £14m in 2016.

Cumulatively over the last three years, Serco said it was tracking 3% better than the contract and balance sheet review charges taken in 2014.

Closing balance sheet onerous contract provision liability now stood at £168m, down from £220m in 2016 and £447m in 2014.

Pre‑exceptional tax costs were £14m, down from £16m year-on-year, with net exceptional costs “significantly lower” at £25m, compared to £68m.

The company’s free cash flow outflow improved by £26m to £6.7m, which included an outflow of £8m as Serco reduced its working capital facility utilisation to zero by the end of 2017.

Net debt widened to £141m from £109m, though the board noted that was around £9m below its guidance range at the start of the year

Its net debt-to-EBITDA leverage was 1.4x, which remained well within its medium term target of between 1x and 2x.

Pension schemes were fully funded, Serco confirmed, and in a surplus on an accounting basis.

Around half of the firm’s pension liabilities were now fully underwritten by bulk annuity purchases, which further reduced pension scheme residual risks.

Looking ahead, the company said its pipeline of larger new bid opportunities had reduced to £4.4bn, as a number of unusually large opportunities moved through the pipeline during 2017.

Of that pipeline, £3bn were opportunities added over the course of 2017.

The board noted the acquisition of BTP Systems, which completed during the period for $20m, bringing “deep skills” in defence satellite communication and radar engineering technical services, together with a pipeline of $200m.

It also highlighted the signing of a revised agreement with the special managers and provisional liquidators of Carillion since year-end, and while it remained subject to requisite third party consents, it said it was continuing to work with all relevant parties to acquire the portfolio of selected UK health facilities management contracts.

The IFRS15 estimated restatement to 2017 was not anticipated to be significant, the board reported, expecting it to decrease revenue by £3m and underlying trading profit by £0.3m.

Its guidance for 2018 remained unchanged, with expected revenues of between £2.8bn and 2.9bn, broadly flat in constant currency.

Underlying trading profit was expected to grow to around £80m, driven largely by transformation savings.

It also expected 2019 to see “further good growth” in underlying trading profit.

“With profits at the top end of the expectations we set out some 15 months ago, net debt lower than we expected, fully funded pension schemes, and strong order intake, we delivered a solid performance in 2017 in a difficult market,” said group chief executive Rupert Soames.

“Most importantly, we expect profits to grow in both 2018 and 2019.

“We understand that getting to this point has been a long haul for investors, and that there is still a long, and probably bumpy, road ahead before we are producing acceptable returns.”

Soames said the company was now moving forward, not backward.

He explained that the benefits of its international footprint had never been more evident, as the UK market for public service outsourcing was afflicted by “well-publicised traumas”.

“This environment may produce opportunities for suppliers with strong track records of delivery, and Serco also has the advantage of choice as to where we allocate resources and effort between different markets.

“Therefore, as well as ensuring that we support our UK customers, and respond appropriately to opportunities as they arise, we will also be investing in our businesses in North America, Europe, the Middle East and Asia Pacific.”

The challenges facing governments around the world remained unchanged, Soames noted.

He said ageing populations were driving demand for “more and better” public services, with almost all governments spending more than they received in tax and citizens having ever-higher expectations of the quality of public services.

“In this environment, governments are likely to want to use all means at their disposal to deliver value for money and high quality public services, which should mean a strong continuing role for the private sector as a provider of innovation, investment and operational management.”