Furlough repayments and staff bonuses put dent in Serco's trading upside

Serco Group said on Thursday that it expected revenue for the year to rise 19% to £3.9bn, with organic growth of 16%.

At the same time, it said it signed a contract to deliver prison services at Acacia Prison for the Government of Western Australia for up to 15 years, and had agreed to acquire Facilities First Australia (FFA) for an enterprise value of AUD 76.5m (£43m), to be satisfied from its existing debt facilities.

Finally, it announced that group CFO Angus Cockburn had informed the board of his wish to retire from full-time executive life, and focus on further developing his non-executive portfolio.

In its trading update, the FTSE 250 company said that underlying trading profit was expected to grow by around 35% to between £160m and £165m, consistent with previous guidance, with the margin increasing by around 40 basis points to slightly above 4%.

It reported “significant” Covid-19 impacts, both positive and negative, across most of its business globally.

That impact was likely to be a positive contribution of around 4% of underlying trading profit, comprising 9% of trading upside.

The upside was partially offset by around 5% of underlying trading profit in the return of government furlough payments, and bonus payments to around 50,000 front-line staff.

Serco said it was in a “robust” financial position, with adjusted net debt expected to be less than £100m, leverage of around 0.5x and “ample” liquidity at year-end.

Its initial outlook for 2021 was for revenue and underlying trading profit to be slightly higher than 2020, reflecting a similar performance for the existing business and a small increase from the fresh acquisition of FFA.

At Acacia Prison, it said the initial five-year period had an estimated value of AUD 445m (£250m).

The contract had provision for two further five-year extensions, with potential value to Serco over the full 15 years, including indexation, of around AUD 1.4bn.

It said the new contract would begin in May, with transition to start immediately.

Serco said it had managed operations at the prison - Western Australia's largest - since 2006.

The new contract was awarded after an open tender process, and for the first time also included facilities maintenance.

“Acacia Prison has been operated successfully by Serco for 15 years and we are delighted that the Government of Western Australia has selected us to continue to support them,” said group chief executive officer Rupert Soames.

“I am very proud of the work we have done there, including overseeing several expansions.

“Our drive for operational excellence, focusing on rehabilitation and reintegration, is central to our work at Acacia, and the new contract will allow us to introduce technology to enhance safety, as well as programs and partnerships, to help the State achieve its policy of reduced reoffending whilst keeping the community safe.”

Looking at the FFA acquisition, Serco said the company’s revenue for the year ended June was AUD 282m, with adjusted EBITDA of approximately AUD 12m and underlying trading profit coming in at AUD 11m.

As such, the transaction represented a multiple of 6.2x June adjusted EBITDA and 6.8x June adjusted EBIT.

The acquisition was expected to be accretive to earnings in 2021, and as a result of the transaction, Serco’s leverage would increase by about 0.2x, from the 0.5x it was expecting to see on 31 December.

Serco said the acquisition had already received Australian Foreign Investment Review Board approval, and was expected to complete on 4 January.

The company described FFA as a specialist provider of cleaning, facility maintenance and management services to government, with over 80% of its revenues coming from long-term government contracts, and an order book of around AUD 434m.

Its 2,500 employees and management team would bring new skills and reach in government facilities management to Serco, the board said, which was expected to see a “significant” amount of bidding opportunities in the coming years.

“This acquisition adds expertise and heft to our facilities management operations in Australia, while retaining our government focus,” said Rupert Soames.

“The combination of Serco and Facilities First will enable Serco Australia to target a significant pipeline of new opportunities which we expect to mature in the next few years.”

Finally, on the CFO succession, Serco said it had agreed for Angus Cockburn to step down from the board at the annual general meeting in April, and would be succeeded as group CFO by Nigel Crossley, currently group director of finance, who would join the board on the same date.

It said Crossley had worked for Serco since 2014, and had been “at the centre” of its transformation and supported Cockburn in restoring its reputation and financial stability.

Prior to Serco, Crossley held senior finance roles at EMI, RHM and Procter & Gamble.

“Angus has played a leading role in the transformation of Serco from the dire straits in which it found itself in 2014, through to the point at which it now has one of the strongest balance sheets in the sector and is in excellent financial and operational health, with strong liquidity, fully funded pension schemes and robust finance controls and assurance,” said chairman Sir Roy Gardner.

“He is hugely respected both inside and outside Serco, and we are all immensely grateful for his contribution, not the least of which has been developing an ideal successor in Nigel Crossley who we look forward to welcoming onto the board in April.”

At 0916 GMT, shares in Serco Group were up 2.25% at 122.7p.