Serco : full year results 2019

Year ended 31 December	2019	2018	Change at reported currency	Change at constant currency
Revenue(1)	£3,248.4m	£2,836.8m	+15%	+13%
Underlying Trading Profit (UTP)(2)	£120.2m	£93.1m	+29%	+25%
Reported Operating Profit (ie after exceptional items)(2)	£102.5m	£80.5m	+27%	+22%
Underlying Earnings Per Share (EPS), diluted(3)	6.16p	5.21p	+18%	+15%
Reported EPS (ie after exceptional items), diluted	4.21p	5.99p
Dividend Per Share (recommended re-instated)	1.0p	n/a
Free Cash Flow(4)	£62.0m	£16.3m
Adjusted Net Debt(5)	£214.5m	£173.2m
Reported Net Debt(6)	£584.4m	£188.0m

Rupert Soames, Serco Group Chief Executive, said: 'The results for 2019 represent the first year of revenue growth since 2013 and the second successive year of growth in profits, and we expect continued strong progress in 2020. 15% revenue growth of which 8% was organic, 29% underlying profit growth and £5.4bn of order intake compares favourably with a market growing at 2-3%. Free Cash Flow has increased significantly, and our leverage ratio is at the lower end of our target range. All this indicates that we have finally achieved escape velocity, leaving behind the gravitational pull of past mis-steps, and gives the Board confidence to recommend paying a dividend for the first time since 2014, which is an important milestone. We are immensely grateful to our committed and hardworking colleagues, our patient shareholders and our supportive customers who have helped us reach this point.

'The benefits of having a broad international presence, with over 60% of our revenues and 50% of our employees outside the UK, are once again evident. We have delivered double-digit organic revenue growth in both our North America and Asia Pacific Divisions, and demonstrated the ability to execute strategically important acquisitions such as NSBU in markets with premium rates of growth. But 2019 is also notable as being the first time since 2013 that revenues have grown in the UK.

'Perhaps the most significant aspect of 2019, however, was the record £5.4bn of order intake, representing 170% of annual revenues, and which resulted in our order book increasing to £14.1bn, an increase of around 40% over the last three years. This is the third successive year our order intake has exceeded our revenues, and underlines the confidence governments have in Serco's ability to deliver critical, sensitive and complex public services.'

Highlights

• Revenue(1) of £3.2bn increased by 14.5%, comprising 8.2% organic growth, 4.8% contribution from acquisitions and 1.5% currency benefit. Very strong constant currency growth in Americas (+35%, of which +19% was organic) and Asia Pacific (+16%). UK & Europe (+5%) grew revenues for the first time since 2013; Middle East (-2%) did well in a difficult market.
• Underlying Trading Profit(2) of £120.2m increased by £27.1m or 29% (25% at constant currency); the NSBU acquisition contributed £8.6m of the increase. The Group's Underlying Trading Profit margin increased by 40 basis points to 3.7%.
• Reported Operating Profit increased by £22.0m, £5.1m less than the increase in UTP as a result of the net impact of various non-trading items including £22.9m related to the conclusion of the SFO investigation and £9.6m related to the commercial settlement received from the MoD as a result of the Defence Fire and Rescue Project tender. Exceptional items included in Reported Operating Profit, at £23.4m, were £8.5m lower than the prior year.
• Onerous Contract Provisions (OCPs) have run off broadly as we expected, with the remaining liability now just £17m. We estimate the total value of OCPs will have been within 2% of the original £447m as at December 2014.
• Underlying EPS of 6.16p increased by 18%, reflecting the growth in Underlying Trading Profit, together with the benefit of the tax rate reducing from 26% to 25%, but with this partially offset by the increase in the number of shares following the Equity Placing in May 2019 to fund the Naval Systems Business Unit (NSBU) acquisition. Reported EPS in the prior year benefited from a number of non-underlying tax credits totalling £11.8m which did not recur in 2019.
• Free Cash Flow(4) improved sharply to £62m (2018: £16.3m), due to the increase in underlying profits, neutral working capital movement and lower cash outflows on the residual OCP portfolio. The number of supplier invoices in the UK paid within 30 days increased to 86% (2018: 85%).
• Adjusted Net Debt(5) at £215m increased over the year by £41m, as the £62m of positive Free Cash Flow was offset by the £55m of acquisition consideration not covered by the Equity Placing relating to the NSBU acquisition; in addition there was a £49m outflow related to exceptional items (2018: £19m).
• Leverage for covenant purposes was 1.17x; underlying leverage was 1.31x. Daily Average Adjusted Net Debt was broadly unchanged at £231m (2018: £219m).
• Acquisition of NSBU, a leading provider of ship and submarine design and engineering services to the US Navy that adds materially to the scale and capability of Serco's defence business, completed in August 2019. Integration progressing smoothly and the business has traded to plan. The acquisitions completed in 2018 of BTP Systems (deepening our satellite and radar capabilities) and of six Carillion health facilities management contracts (adding significant scale to our UK Health business) have performed in line with our expectations.
• Order intake was very strong at a record £5.4bn, representing around 170% of revenues; the three largest awards were for asylum accommodation and support services in the UK valued at £1.9bn, Prisoner Escort and Custody Services also in the UK valued at £0.8bn, and defence healthcare provision in Australia valued at £0.6bn; over 40% of the order intake comprised new business, and the balance was existing work being rebid or extended.
• Order book increased by £2.1bn to £14.1bn, predominately reflecting the strong order intake. Since the start of 2017 the value of our order book has increased by around 40%.
• The Pipeline of larger new bid opportunities closed 2019 at £4.9bn; it was £5.3bn at the start of the year, but reduced to £3.2bn at the half-year stage, reflecting in large part the very strong result of contract awards, followed by good progress in replenishing the pipeline during the second half of 2019.
• Revenue guidance for 2020 is £3.4-3.5bn, representing total growth of 6-8%, which assumes organic growth of around 4%, an acquisition contribution of 5-6% from the annualisation of NSBU, and a currency headwind (based upon recent rates(8)) of 2-3%. Underlying Trading Profit is expected to grow by about 20% to around £145m. This guidance is unchanged from that given at the Closed Period trading update issued on 12 December 2019(7).
• The Board recommends restarting dividends, last paid to Serco shareholders in 2014, with a payment of 1.0p in respect of the 2019 financial year. Assuming this payment and an interim dividend for 2020 in line with our approach, Adjusted Net Debt guidance at the end of 2020 is approximately £200m, with leverage expected to be towards the lower end of our normal target range of 1-2x.