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Serco shares crash after latest profits warning Serco shares crash after latest profits warning
(about 3 hours later)
Serco, the outsourcing company that runs railways, prisons and GPs out-of-hours services, saw its shares crash by a third after it shocked the market with its fourth profits warning this year. Shares in Serco, the outsourcing company that runs railways, prisons and GPs out-of-hours services, crashed by a third after the firm shocked the market with the fourth profit warning this year.
The company, which employs 120,000 people in 30 countries, suspended its dividend and said it planned to tap shareholders for £550m of new funds. It also announced plans to sell non-core assets. The company, which employs 120,000 people across 30 countries, suspended its dividend and said it planned to tap shareholders for £550m in new funds. It also confirmed plans to sell non-core assets, as part of an attempt to restore its fortunes.
The government services group, which has been dogged by scandals, including overcharging the taxpayer for tagging prisoners, said it was writing down the value of its business by £1.5bn. Profits for 2014 are now expected to be £130-40m, around £20m lower than forecast, with the outlook for 2015 also downgraded. The government services group, which has been dogged by scandals, including overcharging the taxpayer for tagging prisoners, said it was writing down the value of its business by £1.5bn. Profits for 2014 are now expected to be £130m-£140m, around £20m lower than forecast, with the outlook downgraded for 2015.
Serco has been forced to reduce its profit outlook after a forensic examination of its books uncovered a raft of problem contracts. The company also revealed that profits would have been flat between 2009-2013, were it not for its controversial contract running Australia’s migrant detention centres, including a facility on Christmas Island, condemned by Australia’s top human rights official for its filthy conditions and high levels of self-harm among inhabitants.
Chief executive Rupert Soames embarked on a strategic review of the troubled business after taking over in June from power generation company Aggreko. The reviews “have encouraged much turning over of stones” he said. The profits downgrade follows a forensic examination of its books uncovered a raft of loss-making contracts.
Chief executive Rupert Soames embarked on a strategic review oafter taking over in June. The reviews “have encouraged much turning over of stones”, he said.
“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.”“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, a grandson of Winston Churchill, said the writedowns were only initial estimates until the review is completed by March 2015. “Whilst it is a bitter pill, it is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco’s future.”Soames, a grandson of Winston Churchill, said the writedowns were only initial estimates until the review is completed by March 2015. “Whilst it is a bitter pill, it is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco’s future.”
The single biggest adjustment, of £150m, stems from a contract with the Australian navy to maintain its Armidale patrol boats, where costs have spiralled because of cracking and corrosion on the boats.The single biggest adjustment, of £150m, stems from a contract with the Australian navy to maintain its Armidale patrol boats, where costs have spiralled because of cracking and corrosion on the boats.
Serco has also increased provisions for a number of UK contracts by £150-£200m, after running into trouble in several areas. One of Serco’s problem contracts is providing housing for vulnerable asylum seekers, where it has been criticised by the government’s spending watchdog for failing to provide habitable properties. Serco’s prisoner escort service to the UK government, where police were called into investigate alleged fraud, has also generated lower revenues than expected. Serco has also taken losses on its service to the Royal Navy, where it supports Sea King helicopters in search and rescue missions. Serco has also increased provisions for a number of UK contracts by £150m-£200m, after running into trouble in several areas. One of Serco’s problem contracts is providing housing for vulnerable asylum seekers, where it has been criticised by the government’s spending watchdog for failing to provide habitable properties. Serco’s prisoner escort service to the UK government, where police were called into investigate alleged fraud, has also generated lower revenues than expected. Serco has also taken losses on its service to the Royal Navy, where it supports Sea King helicopters in search and rescue missions.
The company admitted it had made “strategic mis-steps” in the past, by diversifying into areas of business where it had little expertise, as well as being caught out by changes in public sector contracts that put more risk for contract failure on the supplier.The company admitted it had made “strategic mis-steps” in the past, by diversifying into areas of business where it had little expertise, as well as being caught out by changes in public sector contracts that put more risk for contract failure on the supplier.
Serco said it had been insulated from these mistakes by high profits from running migrant detention centres for the Australian government. Serco recently won the right to continue running the detention centres, which are on offshore Australian territories including Christmas island, which have raised concerns among public health experts over military-style methods used to control inhabitants. Levels of self-harm at the Serco-run centres rose six-fold in six months, after the Australian government made it mandatory to process all claims for asylum offshore. Serco said it had been insulated from these mistakes by high profits from running migrant detention centres for the Australian government. Serco was recently named as the Australian government’s preferred choice to continue running the detention centres, which have raised concerns among public health experts over military-style methods used to control inhabitants. Gillian Triggs, president of the Australian Human Rights Commission, voiced “grave concerns” for the welfare of asylum seekers at Christmas Island centre. Visiting in July she found a sharp escalation in the number of mothers on suicide watch and babies confined to small metal containers, where they cannot learn to crawl or walk. Many children suffered from chest or gut infections as a result of the cramped living conditions. Levels of self-harm at the Serco-run centres rose six-fold in six months, after the Australian government made it mandatory to process all claims for asylum offshore.
The Australian detention centre contract helped Serco profits to grow by 28% between 2009-2013, whereas without it profits would have been flat. Christmas Island is one of 12 immigration centres run by Serco for the Australian government, a contract that has become increasingly important as other parts of the company have run into trouble. The Australian migration contract was worth 10% of Serco’s revenues in 2013 and helped Serco increase profits by 28% between 2009-2013, whereas without it profits would have been flat.
Despite its list of woes, Serco said it had a bright future providing services to government. Deploying ‘a few bad apples’ argument, the company said its recent failures of governance, risk management and individual bad behaviour were “a tiny part of our overall business with public bodies”. Despite the litany of complaints, Serco said it had a bright future providing services to government. Deploying “a few bad apples” argument, the company said its recent failures of governance, risk management and individual bad behaviour were “a tiny part of our overall business with public bodies”.
After initially falling by a third, Serco shares later traded 29% lower, at a 10-year low of 224.5p. The company plans to sell its environment and leisure businesses in the UK, Great Southern Rail in Australia and will stop providing back-office services to some private companies. A slimmed-down company will focus on its businesses in justice, immigration, defence, transport and healthcare.
But Andrew Gibb, an analyst at Investec, warned that the company’s update “might not be the end of the bad news” and that “any turnaround is going to be a long process”.
Serco shares were trading 30% lower at a 10-year low of 220p.