4th Mar 2014 10:47
LONDON (Alliance News) - Outsourcing company Serco Group PLC Tuesday reported a sharp drop in 2013 pretax profit due to its well-publicised issues with certain UK government contracts and the reputational damage that inflicted, and it said its outlook for 2014 remains challenging too, particularly due to issues with an Australian immigration contract.
In a statement, Serco said it faces above-average contract attrition, a reduced volume of work in its Australian immigration contract, and lower-than-expected growth from new contracts in 2014, and it is continuing to predict a mid-single digit organic revenue decline and a 50 to 100 basis point drop in its adjusted operating margin.
The sharp drop in the company's 2013 performance had been well flagged after it was banned from winning new UK government work in the wake of issues with two contracts. The company reported a pretax profit of GBP106.6 million, down from GBP281.1 million in 2012, even though revenues rose to GBP4.29 billion, from GBP4.06 billion.
It booked a charge of GBP90.5 million for its UK government contract issues, mostly for the settlement of its electronic tagging contract and an estimated GBP21.0 million of costs for reviews of its government contracts.
Excluding one-off items, Serco's pretax profit fell to GBP254.4 million, from GBP271.6 million, as it was hit by higher bidding costs but fewer contract awards. It said it had won GBP3.7 billion of new contracts in 2013, meaning its order book stood at GBP17.1 billion at the end of the year.
It held its final dividend at 7.45 pence, although its dividend for the whole year rose to 10.55p, from 10.10p, part of a move to a higher payout ratio.
Just last month, Serco warned that 2014 profits would be well below current expectations as recent unfavorable currency moves and a bigger-than-expected drop in volumes in its Australian immigration contract added to the ongoing costs of its corporate renewal in the wake of its UK government contract issues.
On a more positive note, the UK government said it will allow it to bid for new contracts after a six month ban, as interim Chief Executive Ed Casey led a significant restructuring and "corporate renewal" programme at the company.
The plan, which includes improving governance, management and transparency, creating a separate unit for its UK government work, establishing an ethics organisation that reaches throughout the company, and re-training employees, was brought in after issues were found with two contracts Serco had with the government.
Serco and rival G4S PLC were placed under investigation by the UK government in July and all their government contracts were placed under review, after details from an audit emerged showing that they had been over-charging on criminal tagging contracts, claiming for people who were dead, who had never been to prison, or never tagged in the first place. In November, the Serious Fraud Office opened a criminal investigation into the tagging contracts.
Additionally, the government in August then called in police to examine claims of fraudulent misreporting of data on Serco's contract to transport prisoners to court in London and East Anglia.
In December, the UK Government said Serco would repay GBP68.5 million for the charging errors it made on a criminal tagging contract.
"We have been through a difficult year and there remains much to be done to ensure the agreed programme of corporate renewal is successfully implemented. However, the work we have completed and the undertakings we have made demonstrate our commitment to achieve this," Casey said.
"It is hard for those outside the company to appreciate how disruptive were the events of last year: our pipeline of UK Government opportunities was impacted; reputational damage adversely affected our ability to win contracts with the private sector; and there has been significant management change at the most senior level, whilst the development and implementation of our programme of corporate renewal correctly diverted focus. The inevitable consequence has been a material loss of momentum, particularly in the UK, translating into lower organic revenue growth and profitability than we would otherwise have aimed to achieve in 2014," Chairman Alastair Lyons said in a statement.
"In addition, 2014 will be impacted by a major change of government policy affecting our large Australian immigration services contract, whilst there is also a greater impact of attrition from lost contracts such as Electronic Monitoring," Lyon added.
Last week, Serco said it had poached the chief executive of Aggreko PLC, Rupert Soames, to be its next boss, tasking him with the revival of the business. The move was a coup for Serco. Soames has been head of Aggreko for 11 years, overseeing the temporary power unit company's steady but relentless growth over that period, while the grandson of Winston Churchill and brother of Conservative MP Nicholas Soames is also well-known and well-respected in UK government circles.
As well as continuing the company's rehabilitation in the UK, Soames will have to find work to offset a hit to the company's Australian immigration contract. Last month, it warned that it had seen the volumes it is processing under the GBP400 million contract fall between 25% to 50% year-on-year after the Australian government changed its immigration policy.
Serco won a six-month extension to its contract to provide detention services to the Australian government in late December, building on the five-year contract which began in June 2009.
Serco shares were up 1.1% at 454.93 pence Tuesday morning.
By Steve McGrath; [email protected]; @stevemcgrath1
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