12th Mar 2015 11:37
LONDON (Alliance News) - Shares in embattled outsourcing company Serco Group PLC plunged on Thursday after the company reported a massive pretax loss for 2014, as it booked huge provisions on onerous contracts, reported is first fall in revenue as a listed company, and confirmed it had scrapped its final dividend payout, while also saying it will launch a GBP555 million rights issue at a more than 50% discount.
Shares in Serco were down 15% to 175.00 pence on Thursday, one of the worst performers in the FTSE 250. Shares in the company have fallen 45% in the past six months on the back of a slew of profit warnings.
Serco said its pretax loss for 2014 was GBP1.35 billion, compared to a GBP108.3 million profit a year earlier. The loss was caused by a total of GBP1.31 billion in one-off provisions the company made in the year on asset impairments and other charges. That compares to GBP111.5 million in provisions the company made in 2013, bringing its total writedowns in 2013 and 2014 to GBP1.42 billion.
Revenue also ticked down for the company to GBP3.96 billion from GBP4.28 billion, the first revenue decline Serco has seen since listing on the stock market 25 years ago. It signed contracts worth GBP3.1 billion in the year, down from GBP3.5 billion in 2013, though including joint ventures, the value of new contracts rose to GBP3.6 billion from GBP3.5 billion.
Serco is forecasting revenue of GBP3.5 billion for 2015, though it still expects to face challenges from the net attrition of lost contracts and assumptions of reduced volumes from existing deals.
The provisions and loss mean Serco also scrapped its final dividend, meaning its total payout for the year is 3.1 pence from its interim dividend. In 2013, it paid 10.55 pence per share in total dividends.
Serco also launched a previously planned GBP555 million, fully underwritten rights issue to support a refinancing of its existing lending facilities in order to cut its gross debt pile by GBP450 million.
It will issue 549 million shares under the 1-for-1 rights issue at 101 pence per share, a 51% discount to its closing price on Wednesday and a 34% discount to the theoretical ex-rights issue price. It said it intends to use the proceeds of the deal to reduce it indebtedness.
The GBP555 million fundraising is higher than Serco had originally flagged it would be, having said in a profit warning it issued in November that the rights issue would raise "up to GBP550 million".
"2014 has been an extremely difficult year for Serco, and the magnitude of the provisions, impairments and other charges reflects the scale of the challenges we have had to face. However, there is a real sense that, having confessed our sins and in taking the punishment, we are now ready to start on the path to recovery," Serco Chief Executive Rupert Soames said.
Serco said it has now completed a strategic review of the business and will, in the future, focus on the provision of services to the public sector market. The group said it will focus on five market sectors, comprising Justice & Immigration, Defence, Transport, Citizen Services and Healthcare. The company said it thinks the markets it has chosen to focus on have "compelling long-term structural growth drivers" and that it is well-positioned to benefit from this growth.
As part of the strategic review, Serco also confirmed its plans to dispose of a number of non-core businesses, with the resulting proceeds to contribute to a reduction of its net debt. This will include its Environmental Services and Leisure businesses in the UK, the Great Southern Rail business in Australia and the majority of its private sector outsourcing businesses.
In aggregate, the businesses contributed around GBP560 million of revenue in 2014, and Serco said that should any of the disposals complete in 2015, it expects its revenue and profit will fall and warned the hit to its results could be material depending on the timing of the disposals.
Serco said the sales processes for all the businesses are ongoing, and it is encouraged with the progress made so far and does anticipate transactions to complete later in 2015.
"We have all we need: a good plan, strong management to execute it, and, following the successful completion of our proposed rights issue and refinancing, a balance sheet that is an appropriate foundation on which to implement our new strategy," said Soames, who was recruited from temporary power firm Aggreko PLC early last year.
Serco said it has faced "numerous challenges" in 2014. The company had to increase costs in order to improve service delivery on some poorly-performing contracts; saw reduced volumes or contract losses on deals with higher-than-average margins and won less new work.
The charges it booked were spread across the business, with lower contract volumes on its Australian Immigration Services deal, the loss of its electronic monitoring contract with the UK government, and new contracts being won at lower margins, including its support services deal for the US Affordable Care Act.
The group also won fewer contracts, was hit by contract re-pricing on its deal with Northern Rail and the UK Atomic Weapons Establishment nuclear deterrent programme and saw costs rise as it upgraded service delivery on underperforming contracts, including the COMPASS asylum seeker accommodation scheme and the PECS prisoner escort deal.
Revenue fell in all of the company's operating divisions, with the exception of its Global Services private sector outsourcing business, which was boosted by new contract wins and expanded work on existing deals in India and the Middle East.
UK Central Government revenue fell to GBP962 million from GBP1.07 billion, hit by the loss of its electronic monitoring contract with the UK government, the re-categorisation of Ashfield prison and the end of its Colnbook Immigration Removal Centre contract. The division also took a hit from volume-related falls in its strategic partnership with the Defence Science and Technology Laboratory and other defence-related projects. This was partially offset by additional project revenue from the expansion of Thameside prison and from additional users on the COMPASS programme.
But the division was pushed to an operating loss by substantial provisions taken on UK government contracts, including GBP115 million of charges taken on the COMPASS contract, GBP66 million on its Royal Navy fleet support services deal, GBP27 million on PECS, and GBP19 million on Ashfield.
Its UK and Europe Local and Regional Government business saw revenue broadly flat in the year, boosted by new contracts with the European Commission and European Space Agency, though this was offset by lower volumes from the National Citizen Service and Work Programme contracts. It booked provisions in the division on its loss-making Suffolk Community Healthcare programme and took writedowns on its Hertfordshire County Council outsourcing contract and Anglia Support Partnership deal.
The other division booking huge writedowns was its Asia-Pacific arm, where revenue dropped 19% on the back of a 35% fall in revenue from its Australia Immigration Services contract, the largest single contract in the division. The provision for the business, however, was driven higher by its Royal Australian Navy support services contract, resulting from higher-than-anticipated maintenance expenditure, which is set to result in higher costs for the business through the operation of the contract to 2022. The provision booked on the Australian navy contract is GBP136 million, with a further GBP60 million in impairments also booked in the division.
The results in its Middle East and Americas divisions were slightly more sanguine, with operating losses posted for both units and revenue ticking lower, though the provisions booked were less dramatic than in Serco's other divisions.
In the Americas business, revenue was boosted by its support services contract for the Affordable Care Act, which was dragged lower overall by weakness on certain US intelligence agency IT contracts and support services deals with the US Federal Retirement Thrift Investment Board and the Department of Veteran Affairs.
In the Middle East, revenue was broadly flat for the year, boosted by transport operations in Dubai, new health services deals in Abu Dhabi, and defence training services in Qatar, but pulled lower by the end of air traffic control operations in Kurdistan and overall delays in winning new contracts.
Liberum says Serco's results were in line with the revised guidance the company gave in its profit warning in November, but said the size of its rights issue was bigger than the market had expected.
Liberum analyst Joe Brent calculated a theoretical ex-rights price of 154 pence and a bonus factor of 1.34. Deep discounted rights issue are treated as a bonus issue of shares, plus an issue of fully paid up shares.
"We are not surprised at the large discount given market volatility and election uncertainty, which is particularly relevant for Serco," Brent added.
The analyst said the overall outsourcing industry dynamics are unattractive, with structural pressure from austerity and near term pressures from the general election in the UK.
By Sam Unsted; [email protected]; @SamUAtAlliance
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