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Serco warns of big drop in profits as it overhauls its ethical position: Overcharging scandal damages bottom line Gloom over prospects for new work hits shares

January 31, 2014

Sean Farrell

Shares in Serco plunged yesterday after it said annual profits would be up to 20% lower than expected as the scandal over overcharging for government work continues to inflict damage on the troubled outsourcing company. Within minutes of the government announcing it had approved the firm's plans to overhaul its internal ethics after a string of scandals, the company admitted the continuing fallout meant profits for 2014 would be 10%-20% lower than the pounds 277m investors had been expecting. Serco's shares fell nearly 17% by 86p to 423.2p - not far above the four-year low of 418p they hit in November last year when the company was barred from seeking new government work. The company said it expected revenues to fall because of fewer new assignments and the loss of its contract for the electronic tagging of prisoners and other work. It was also gloomier about its prospects of winning contract extensions and new assignments during the year. Cabinet Office minister Francis Maude said Serco's proposed internal reforms were what the coalition was looking for and the company is now eligible to be awarded government contracts. But he said the government wanted to see the plan taking effect before its confidence was restored, suggesting Serco could struggle to gain new work for some time. Maude said: "The changes that Serco has already made and its commitment to go further over coming months are positive steps that the government welcomes. However, Serco's corporate renewal is an ongoing process and the government places a strong emphasis on the full and timely implementation of the agreed corporate renewal plan." The company has been in crisis since July when the government accused it of charging to electronically tag offenders who were dead or in prison. The Cabinet Office barred Serco and its rival G4S from receiving new state contracts while it reviewed their operations. Serco had already warned investors in November that its profits would be affected for two years by the scandal and City analysts had cut their forecasts. It issued the latest profit warning after realising that the damage would be worse than expected. On top of hits to revenue and margins, which also include reduced business from running Australia's immigration detention centres, Serco will spend pounds 25m this year on its clean-up plan, including one-off costs of pounds 10m to pay advisers and fund training and new systems. David Greenall , an analyst at RBC Capital Markets , said the profit warning meant Serco's net debt could climb to 2.7 times its earnings and that the company might be forced to raise cash. "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," said Greenall. Serco agreed last month to pay pounds 68.5m plus VAT to compensate taxpayers for overcharging plus pounds 2m in profits from its prisoner escorting contract. The Serious Fraud Office has opened a criminal investigation into the tagging affair, which damaged Serco's reputation and its relationship with the government, its biggest customer. Running prisons, medical services, railways, defence contracts and other state work makes up about a quarter of the group's revenues. The renewal plan includes a management pledge to "do what is right", a new code of conduct, better training and performance management, separate management of UK central government work, a board-level corporate responsibility committee and ethics committees in each division. Serco is without a chief executive after Chris Hyman left in October. The company said yesterday it expected to appoint his replacement soon. Acting chief executive Ed Casey said: "We have been through a very difficult period since July of last year, which has had a major impact on Serco : reducing near-term growth, diverting management focus, and adding costs to strengthen the business. We are now able to assess more clearly the adverse impact that continues into 2014. "Nonetheless, following the continued implementation of our corporate renewal plans, Serco will be in a stronger position to compete effectively and return to making sustainable progress." RBC's Greenall said costs for the corporate renewal plan would probably affect G4S and that one-off charges could be bigger at G4S than at Serco . 20% Maximum expected drop in Serco's profits this year after losing its contract for electronic tagging of prisoners Captions: Serco admitted to overcharging the government in its contract to escort prisoners Photograph: Dan Kitwood/Getty Images

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Source: Guardian (UK)

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