19th Dec 2024 09:42
(Alliance News) - Serco Group PLC on Thursday said the outlook for 2025 is "positive", after an improved second half performance in 2024 led it to issue improved free cash flow and debt guidance.
In response, shares in the Hampshire-based outsourcer jumped 6.9% to 148.30 pence each in London on Thursday morning. It was the best performing stock in the FTSE 250, which was 1.0% lower.
For 2024, Serco expects revenue of GBP4.8 billion, in line with guidance, down 1.4% from GBP4.87 billion in 2023. It would represent an organic revenue decline of around 3%, Serco said.
The company noted an improving trend through the year with a second half organic revenue decline of 1% compared to the 5% drop seen in the first six months of 2024. This improvement was led by North America, Serco noted.
The step up in the second half came despite an around 5% impact from the expected lower revenue on its UK immigration contract, with strong organic growth in North America after securing new contracts in the defence sector.
Underlying operating profit of GBP270 million is forecast in 2024, up 8.4% from GBP249 million in 2023, and an increase of more than 25% in the second half compared to the same period of 2023.
A 50 basis point increase in full year margin is projected to around 5.6% reflecting an ongoing focus on efficiency and productivity.
Free cash flow guidance was increased to GBP170 million from GBP150 million, while Serco now expects adjusted net debt to be GBP145 million, GBP20 million better than prior guidance.
In 2023, free cash flow was GBP209 million and adjusted net debt GBP109 million.
Serco flagged a "much improved" order intake in the second half resulting in an expected book-to-bill for the full year of around 100%.
The pipeline of new business opportunities is set to end the year at the "highest level in more than a decade", it added.
For 2025, Serco projects revenue in line with 2024 at around GBP4.8 billion, despite an around 7% revenue reduction from immigration contracts in the UK and Australia. Good organic growth is anticipated in US defence.
Underlying operating profit is forecast around GBP260 million with a "good" margin of around 5.4%, within the firm's medium-term target of 5% to 6%.
Chief Executive Mark Irwin said: "We built stronger trading momentum in the second half of the year, particularly in our North America business, and delivered good margin gains."
"The outlook for 2025 is positive, with continued momentum in North America and new contracts mobilising, mitigating previously announced higher UK employment costs and lower revenues in immigration. Our European business has seen significant growth over the past two years, and we are optimistic about further growth opportunities across the EU."
He said the financial position is "strong," leaving the business well-placed to invest to support organic growth, increase ordinary dividends, and pursue "value-enhancing" acquisition opportunities and to return surplus cash to shareholders.
Serco said it had completed a GBP140 million buyback in 2024, taking the total amount returned to shareholders through buybacks to GBP340 million since 2021.
Analysts at RBC Capital Markets said guidance for 2024 and 2025 is in line with expectations.
"Encouragingly [second half] book to bill was very strong, the pipeline is at the highest level for a decade and momentum within the business is strong excluding the two recent discrete events (Australian immigration contract loss and higher UK [national insurance] costs). With strong visibility going forward, potential news on balance sheet usage and very attractive valuation metrics, we remain at outperform, with a 230p target."
By Jeremy Cutler, Alliance News reporter
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