2nd Dec 2021 10:52
(Alliance News) - Serco Group PLC is preparing to lose most of its pandemic-related business with the US National Health service, despite the new scare caused by the Omicron variant.
Serco provides outsourced services for governments. Ahead of a capital markets day being held on Thursday afternoon in London, it reiterated 2021 guidance and laid out new medium-term targets.
Serco shares were up 1.5% at 135.80 pence early Thursday in London. The wider FTSE 250 index was down 0.7%.
The company expects revenue of GBP4.4 billion in 2021, up 13% from 2020. Underlying trading profit is seen at no less than GBP225 million, up 40%. It expects to end December with its pipeline of new opportunities higher than it was in June.
Looking to 2022, Serco expects revenue to slip to between GBP4.1 billion and GBP4.2 billion, down about 6%. "We expect lower demand for Covid-19 related services in 2022 to reduce our revenue by approximately 13%, with organic growth on non-Covid work to be around 5%, in-line with our new medium-term growth targets," the company said.
Underlying trading profit is expected to be GBP195 million in 2022, Serco said, down at least 13% from 2021. More positively, net debt is expected to be cut to GBP160 million from GBP220 million in 2021.
Davy Research said the initial guidance for 2022 from Serco was slightly below its own estimates. "This clearly assumes most of the NHS business will fall away, which is perhaps a topic for debate at this point," Davy said. "We continue to believe these numbers may well be conservative."
Looking further out, Serco said it expects its addressable market to grow by around 2% to 3% per year over the medium-term, and it expects its own revenue will grow at twice this rate, at around 4% to 6% from a base year of 2022.
It is targeting margin growth of 50 to 100 basis points to 5% to 6%, as well as the conversion of at least 80% of operating profit into cash. With this improved cash flow, Serco plans to reduce dividend cover to around 3 times from 4 times.
Chief Executive Rupert Soames said reduced government spending on the pandemic will knock revenue and profit in 2022, but he anticipates good growth in the parts of the business not involved in Covid-19 related services.
"At our Capital Markets Event this afternoon we will show investors why we expect the market for government services to continue to be robust, and, from 2022 onwards, how our strong and differentiated position will enable us to grow our revenues faster than the market, our profits faster than our revenues, and our returns to shareholders faster than profits," said Soames.
By Tom Waite; [email protected]
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