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Serco shares plunge after the outsourcer, which runs everything from prisons to Boris Bikes, issues fourth profit warning Serco shares plunge after the outsourcer, which runs everything from prisons to Boris Bikes, issues fourth profit warning
(about 14 hours later)
Shares in scandal-hit Serco plunged more than 30 per cent after the company, which operates everything from prisons to Boris bikes, issued its fourth profit warning this year. Serco unveiled plans to tap investors for £550m worth of new funds on Monday as the scandal-hit operator of prisons, railways and GP services delivered its fourth profit warning in 12 months yesterday and admitted it could breach its banking covenants by the end of the year.
The firm was also forced to write down the value of its business by £1.5 billion – when the whole company’s market value was just £1.7 billion - as it sells off scores of division at a loss to try to turnaround the business. The latest warning from the outsourcing giant knocked more than £500m from its value yesterday as its shares fell 32 per cent to 102.1p.
The cacophony of bad news saw new chief executive Rupert Soames declare: “Talk that the government is soft on contractors is belied immediately when you see our results.” Serco is now planning a £550m rights issue at the start of next year, after it slashed its profit forecast for this year by £20m to £130m and cut next year’s outlook. The lower profits mean the FTSE 250 firm is set to breach a borrowing covenant, forcing it into talks with lenders. The company is also booking a £1.5bn writedown on loss-making contracts in the UK and Australia.
Serco is now planning a £550 million rights issue at the start of next year, after it slashed its profit forecast for this year by £20 million to as low as £130 million, and cut next year’s outlook. The lower profits mean the FTSE 250 firm is set to breach a borrowing covenant, forcing it into talks with lenders to amend its conditions. Serco’s chief executive Rupert Soames, who took over running the firm in May,  dismissed criticism that he was “kitchen-sinking” – highlighting negative news so that performance and the share price can only get better. He said: “These very large numbers [of impairments] will come as a bitter pill to all concerned, but they’re better faced up to.”
After starting at Serco in May, Soames had planned a major strategy update next March, but today told the Standard: “When we saw the scale it, we had to put it on the table earlier and face up to it.” Serco is still recovering from the fallout from when it overcharged the taxpayer by tens of millions of pounds for tagging criminals who were actually dead or imprisoned.
He dismissed talk that he was “kitchen-sinking” – highlighting negative news so that performance and the share price can only get better – saying: “Like the story of the three bears and their porridge, this update is neither too hot not too cold but just right. These very large numbers [of impairments] will come as a bitter pill to all concerned, but they’re better faced up to.” Mr Soames, who said he will present his Strategy Review in full as planned at the groups’ full year results next March, said Serco was suffering from ministers’ improved ability at driving a bargain. He claimed “the Government has got much more adept at writing contracts and transferring risk to the private sector”. He argued that “talk the Government is soft on contractors is belied immediately when you see our results”.
Serco is still paying for the massive clean-up operation after it overcharged its biggest customer — the taxpayer — by tens of millions of pounds, claiming it had tagged criminals who were actually dead or imprisoned. It faced a six-month ban on government contracts and is now spending millions to “do whatever is necessary to fix the operational performance” to keep its biggest customer on side. He added that the company would focus on public services rather than private contracts and will now focus on justice and immigration, defence, transport, citizen services and healthcare which he said Serco is “really good at, where we deliver outstanding service, and where our skills, experience and international reach can differentiate us.”
“In our business, we have very long contracts,” Soames added. “If you have one losing even quite a small amount of money, and it has another 10 years to run, you end up quickly with large losses.” He acknowledged: “There are a tough couple of years ahead as we make this transition, but it will be worth it.”
Soames said Serco was suffering from Ministers’ improved ability at driving a bargain: “the Government has got much more adept at writing contracts and transferring risk to the private sector,” he said. “The UK is now to government contracting what Silicon Valley is to IT. And bluntly, we have been caught on the wrong end of a lot of that risk transfer. Contracts that have gone wrong for us in UK and it’s costing us a lot of money.” Analysts yesterday warned the situation could still get worse. Andrew Gibb at Investec said: “This might not be the end of the bad news and any turnaround is going to be a long process.”
He hinted that new deals would be pricier for the taxpayer: “This can’t go on for ever,” he said. “There’s a pendulum that has swung from one end to another, presumably it will swing back.” Serco added that it was “learning to say "no" when we think risk outweighs reward.” Mr Gibb added: “Management are talking about a nadir in 2016… [but] until the full details of the [the company’s strategic] review are known and confirmation from the banks and appetite for the proposed rights issue are known, it is very difficult to take a firm view on this stock.”
Shares – which stood at 674p before the taxpayer scandal broke last summer - fell 93.6p to 223.5p.