Serco warns on profits as government ban is lifted

Last updated: January 30, 2014 6:53 pm

Hundreds of millions of pounds were wiped off Serco’s market value on Thursday after a UK government decision allowing it to bid for public sector work was overshadowed by a warning that profits would be hit by troubled contracts in the UK and Australia.

Serco, which runs facilities from prisons and hospitals to air-traffic control towers, had been barred from winning fresh government work after it was referred to the City of London police for manipulating figures on a prison van escorting contract and to the Serious Fraud Office for overcharging on electronic tagging.

But the government said on Thursday it was reassured Serco “had developed a thorough plan for corporate renewal”. Although it will continue to monitor the group, the Cabinet Office said it had “accepted this plan represents the right direction of travel to meet our expectations as a customer”.

Serco welcomed the news that it would be considered “on an equal basis” to other suppliers for public sector contracts, but it also warned that the scandals would continue to have a “negative impact” on profitability this year.

Investors had expected operating profit of £277m for the year that ends in December 2014 but Serco said the final figure could be between 10 per cent and 20 per cent lower. Its shares plunged 17 per cent to close at 423.2p, wiping £431m off the value of the group, which fell to £2.1bn.

Serco cited as factors the cost of corporate renewal, the withdrawal of the electronic monitoring work and a scaling back of its largest contract – a five-year deal to manage onshore detention centres for the Department of Immigration and Citizenship in Australia. Serco will also spend £25m this year on its clean-up plan, including one-off costs of £10m to pay advisers and fund training and new systems.

Serco continues to search for a new global chief executive after Chris Hyman resigned in the midst of last year’s crisis. Further job losses are expected as part of a continuing restructuring of the business.

David Greenall, analyst at RBC Capital Markets, warned that a big concern was Serco’s mounting debt. “We would note that other outsourcers have raised money when the ratios have moved to these levels, while potential customers may think twice about outsourcing to a company which is more financially stretched,” he said.

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