Serco lifts revenue and profit guidance after strong third quarter

Serco reported strong revenue growth in its third quarter on Friday, along with good cost control, leading to an upgrade of its full-year revenue guidance to around £3.9bn, and underlying trading profit to between £160m and £165m.

The FTSE 250 outsourcing specialist said that would represent organic growth in revenues of around 15%, growth in underlying trading profit of more than 30%, and an underlying trading profit margin of just above 4%.

It said the range of outcomes around those numbers was wider than would normally be the case, as on some contracts customers were adjusting their requirements week-by-week in response to the challenges of Covid-19.

“All of our regions worldwide are performing better than we expected and have increased their forecasts for 2020,” the board said in its statement.

“In both group and in the divisions, effective cost control and the ability of our systems to respond efficiently to increased demand has helped increase margins.”

Serco said that in the United States, it had seen strong performances across a number of contracts, including its Center for Medicare and Medicaid Services (CMS) contract, the US Federal Emergency Management Agency (FEMA) contract and the Anti-Terrorism/Force Protection (ATFP) framework contract for US Naval Facilities.

In the UK, it was awarded extensions to its contracts to provide test sites and call handlers for NHS Test & Trace, which the board described as an indication of the customer's satisfaction with the quality of work delivered.

It also saw increases in the number of asylum seekers it was looking after on behalf of the Home Office, and its new Prisoner Escorting contract had been successfully mobilised.

The company also secured an extension to the Emergency Measures Agreement on the Caledonian Sleeper train service to the end of the year.

!In Australia, restrictions on movement as a result of Covid-19 has meant additional work for both our immigration services and our Citizens Services businesses.

“In the Middle East, there has been an increase in project-related work on rail and facilities management contracts.”

Looking at its financial position, Serco said cash generation in the third quarter was also better than expected and, in particular, there had been an “almost complete” catch-up on delays in processing billings on its FEMA contract in the US, which held back cash generation in the first half.

The board said it now expected adjusted net debt to be between £100m and £150m at the end of December, with leverage of around 0.6x.

Following the issue of $200m (£154m) of US Private Placement loan notes, the firm said it expected headroom on its committed finance facilities to be at least £500m.

“As announced in our first half results, we intend to repay early, and probably in the next few weeks, UK Government VAT deferrals.

“Also as announced in August, we will take a decision about dividends previously withdrawn 2019 final, and deferred 2020 interim, in December.”

Looking ahead, Serco said the Covid-19 crisis made forecasting “extremely” difficult.

“We expect the uncertainties of 2020 will persist into 2021 as the world grapples with recurring outbreaks of infection.

“We have only just started our budget review process, and we would not have a view concerning 2021 today which is materially different from that which we had at the time of our half year results in August.”

At 0854 BST, shares in Serco were up 11.91% at 132.5p.