Serco share price plummets after profit warning

Outsourcing firm Serco sent share prices tumbling by almost 33 per cent yesterday, after issuing a profit warning and revealing that it was seeking to raise up to £550m with a rights issue in the first quarter of 2015. 

 

The company announced that its forecast profit for 2014 had been reduced by approximately £20m, now expected to come in at between £130m and £140m. The firm previously announced a profit warning in April of this year, when the board stated that it expected to report a profit of £170m. This was already significantly reduced from the projected range of £220m to £250m profit reported at the time of Serco’s 2013 results.

 

Serco also stated yesterday that contract and balance-sheet reviews had identified likely impairments and onerous contracts totalling around £1.5bn, and said the company is to hold discussions with lenders to negotiate amendments to covenants in place.

 

Rupert Soames, group chief executive, undertook a strategic review of the entire company when he joined the business in May. He stated that Serco had made “rapid progress” with this review in recent weeks. 

 

Soames described yesterday’s ann­ouncement as a “bitter pill”, but added: “It is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco’s future.

 

“As might be expected, the contract and balance-sheet reviews have encouraged much turning over of stones, and reflects our changing strategy and the latest view of the challenges we face on a few large contracts. These challenges, together with a less pronounced improvement in trading in our second half than we expected, have led us to a more cautious view of 2014 and 2015.”

 

Soames said that Serco’s direction for the future was “clear” – as an international business to government company focusing on justice and im­m­igration, defence, transport, citizen services and healthcare. He commented: “There are a tough couple of years ahead as we make this transition, but it will be worth it.”

 

■ Serco said it had come to the conclusion that the firm had made “two strategic mis-steps” in recent years. The first was making significant additions to its portfolio, “often into areas that required very different skills”, which had led it to lose “some of its focus” and diluted its operational expertise.

 

■ The second mistake Serco admitted to was concentrating too much on winning new business with the result that it was now tied in to a number of contracts which are “making large losses”. 

 

■ Contract reviews have highlighted a “substantial increase in the level of onerous contract provisions”.

 

ANDREW TUSA | BANK OF AMERICA MERRILL LYNCH

 

1 Andrew Tusa, director corporate broking Europe at Bank of America Merrill Lynch, is advising on Serco’s rights issue.

 

2 Tusa joined the bank in 2005, and is currently based in its London office. He previously spent nine years at Deutsche Bank, where he was head of corporate governance.

 

3 He was also chairman of the Financial Services Authority’s Listing Authority Advisory Committee, and served on the steering group of the Financial Reporting Council.

 

Tusa has previously advised on placings made by mining firm Centamin and property developer RedRow. In addition he led the team advising on Halford’s £73.2m purchase of Nationwide Autocentres, and worked on Kesa Electrical’s disposal of Comet Group.