11th Aug 2015 08:41
LONDON (Alliance News) - Outsourcer Serco Group PLC on Tuesday said it swung to a pretax loss in the first half of 2015, in line with its expectations, but reiterated that overall trading in the half was better than had been anticipated, even as revenue fell and it scrapped its interim dividend.
Investors welcomed the results, as shares in Serco rose 2.2% in early trade to 128.20 pence, one of the best performers in the FTSE 250.
The company, which booked a significant pretax loss for 2014 due to writedowns it booked on a large number of onerous contracts, said its pretax loss for the six months to the end of June was GBP76.2 million, versus a GBP10.9 million profit a year earlier, as it took GBP117.4 million in exceptional costs, split between asset impairments and refinancing costs related to its recent rights issue of shares.
Serco said revenue in the half was down to GBP1.79 billion from GBP2.03 billion a year earlier, in line with the guidance the group gave in its first-half trading update, and it maintained its expectations for trading profit for the year to come at around GBP90 million, with risks now to the upside. It cautioned, however, that its guidance for the full year excludes any potential writedowns it may have to take.
The group said it signed GBP1 billion in contracts in the half and said its total bid pipeline remains in excess of GBP5 billion.
Still, as it booked the loss, Serco said it would pay no interim dividend, having paid out 3.10 pence per share a year earlier.
"This is a respectable start to what will be a long, and no doubt occasionally bumpy, road to recovery. In the period we completed some essential first steps, most notably raising the equity and refinancing our debt which has given us much a stronger balance sheet," said Chief Executive Rupert Soames.
"Trading in the period was a little better than we anticipated at the time of the rights issue, and we are maintaining our previous guidance for 2015, albeit that we now believe that the risks associated with this guidance are weighted to the upside. As previously stated, we expect that revenues and profits will continue to be under pressure in 2016," Soames added.
Organic revenue for Serco, which is at constant currencies and which adjusts for disposals and acquisitions, was down by 11% in the half, primarily due to the end of contracts including the Docklands Light Railway transport system in London and its deal running the National Physical Laboratory on behalf of the UK's Department for Business, Innovation and Skills.
Organic revenue was also dragged lower by the end of certain US intelligence agency IT support services deals and visa processing work and reduced volumes and rates in its Australian Immigration services contract, though the latter's reduction was less than had been expected.
These declines were partially offset by the start of new contracts including the Caledonian Sleeper train service, the sleeper train which runs between London and Scotland, and a ramp-up of operations on other contracts, including the Fiona Stanley Hospital in Australia.
Serco said it signed contracts valued at GBP1.0 billion in the first half, the largest of were those with the Saudi Railway Co and the new district hospital deal it signed for NHS Dumfries and Galloway. The majority of the deals signed in the half were re-bids and extensions, the group said, with its win rate on new contracts at around 40% and at about 80% for re-bids and extensions.
Its pipeline of new larger bids at the close of the half comprised 30 potential opportunities with a total estimated contract value of GBP5 billion, largely unchanged over the half as only a small number of bids had been decided upon and only a smaller number entered the pipeline.
Its order book at the close of the half was at GBP11.5 billion, down from the GBP12.6 billion it had in place a year earlier. In terms of visibility, the group has around 93% of its GBP3.5 billion full-year revenue guidance booked, but looking to 2016, the group expects its revenue will decline by another 10% amid GBP350 million in contract losses and other known areas of revenue reduction.
The biggest hits for 2016 will come in its local and regional government business, with its business process outsourcing deals with Suffolk Community Healthcare, the National Citizens Service and Thurrock Council to come to a close, along with further reductions in the Australian Immigration Services deal and the managed exit from a number of private sector outsourcing contracts.
"Many challenges remain, but we are now heading in the right direction. With the rights issue and refinancing behind us, we can now focus on the service we provide our customers and delivering our strategy," Soames added.
In April, Serco raised GBP555 million in a rights issue of shares sold at a 50% discount to their market price.
Serco is in the midst of a restructuring of its business to focus on the provision of services to the public sector market, following a review conducted of the business by Soames, which ultimately led to it booking a GBP1.31 billion writedown in 2014. For that year, the company also posted its first fall in revenue as a listed company as it suffered the fall-out from two troubled contracts it held with the UK government, the issues from which led to it being banned from winning any new government deals back in 2013.
As part of the strategic review, Serco said it will dispose of a number of non-core businesses, with the proceeds from the sales to be used to pay down its debt. One of four identified disposals was completed in the half, the sale of its Great Southern Rail tourist travel operation in Australia, and the group said it is working on the sale of its Intelenet private sector business process outsourcing arm and on the sales of its environmental services and leisure businesses.
The review also is focused on cutting the group's cost, and Serco said it took out a further GBP200 million year-on-year in the half, helping to offset the reduction in revenue. The majority of the cost cuts came from exiting contracts, from reduced volumes or disposals. It said Tuesday its cost-cutting plans for the full year remain on track.
By Sam Unsted; [email protected]; @SamUAtAlliance
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