Serco reported underlying trading profit at constant currency jumped 40% to £93.1m in the year to 31 December.
Sales guidance for 2019 increased from a range of £2.8bn to £2.9bn to a range of £2.9bn to £3bn, reflecting recent contract wins.
Following an encouraging start to the year, underlying trading profit is now expected to be approximately £105m; this represents the top end of the £95-100m guidance range issued on 13 December 2018, together with a £5m increase as a result of the adoption of IFRS16 (with an offsetting £5m increase to net finance costs).
The rise in profit was driven by a strong operating performance, further good progress on transformation savings and other cost efficiencies, as well as £10m of non‑recurring trading items such as end-of-contract settlements.
There was an adverse currency impact of £4m or 6%, resulting in a 34% increase at reported currency. Margin increased by a percentage point to 3.3% (2017: 2.3%).
The improvement in performance was widely spread, with all regional divisions delivering double-digit percentage growth in UTP and increases in margin.
Revenue at constant currency declined 5.6% in the first half, but grew 2.5% in the second half, resulting in a decline for the full year of 1.7%.
This comprised a 3.1% organic decline from net contract attrition, partially offset by a 1.4% net contribution from acquisitions.
The adverse impact of currency in the full year was £65m, or 2.2%, resulting in a 3.9% decline in revenue at reported currency.
- Reported operating profit increased nearly fourfold, and includes a £23.6m net credit from contract and balance sheet review items (2017: net charge of £24.2m) offset by a net charge for exceptional items of £31.9m (2017: net charge of £19.6m), neither of which are included in underlying trading profit.
- Onerous contract provisions (OCPs) are ahead of our 2014 plan and the residual liability now stands at £82m, down from £447m in 2014 and £147m at the start of the year.
- Underlying EPS increased by 55%, reflecting the growth in underlying trading profit, together with the benefit of the tax rate reducing from 35% to 26%. Reported EPS, which includes the after-tax impact of non-underlying items as well as net exceptional costs, stood at 5.99p (2017: loss per share of 0.76p).
- After three years of outflows, free cash flow turned positive at £25m.
- Net debt increased by £47m (2017: £32m), as the positive free cash flow was offset by £19m of exceptional items, net acquisition consideration of £31m and a £22m negative net foreign exchange impact largely related to our US denominated debt. However, growth in EBITDA resulted in underlying leverage of 1.23x and of 1.06x for covenant purposes, comfortably around the bottom of our normal target range of 1-2x.
- During the year we successfully refinanced our banking facility on terms similar to those previously in place, with a £250m revolving credit facility now committed until December 2023.
- Acquisitions: BTP Systems, acquired for £13m in February 2018 with the intention of deepening our satellite and radar capabilities, is now fully integrated within our US defence business. Six Carillion health facilities management contracts in the UK, acquired for £17m, have now been successfully transitioned to our ownership and management.
- Order intake of £2.9bn, book-to-bill ratio over 100%; 80% of order intake was from customers of our Americas, Middle East, AsPac and continental European operations, with the remaining 20% from the UK.
- 66% of the order intake comprised existing work being rebid or extended, and 34% was new business. The largest award was the rebid of our US health insurance eligibility contract valued at around £700m, with over 40 other awards worth more than £10m.
- Order book increased to £12bn, up from £10.7bn a year earlier; the increase includes the strong order intake together with £0.7bn added via the acquisition of the Carillion health facilities management contracts and an adjustment to the definition to align with IFRS15 future contractual revenue.
- Pipeline of larger new bid opportunities increased by £0.9bn to £5.3bn at 31 December 2018; the £2.5bn of contract awards in January and February 2019 for AASC and NGHS have the effect of reducing the pipeline by £1.7bn.
- Net debt at the end of 2019, excluding lease obligations newly recognised under IFRS16, is expected to be approximately £200m, equivalent to covenant leverage of approximately 1.3x.