30th Jan 2014 12:55
LONDON (Alliance News) - Serco Group PLC saw its shares plunge again Thursday after it warned that 2014 profits will 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.
The support services company issued a profit warning for 2014, saying it currently expects its adjusted operating profit to come in about 10% to 20% below current market forecasts for GBP277 million.
The warning overshadowed news that the UK government will now allow it to bid for new contracts after a six month ban, as long as Serco continues to implement its corporate renewal programme. The Cabinet Office said it had given a positive assessment of the plan so far.
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.
The issues hit the company hard, preventing it from moving forward on potential new UK government contracts and weighing on potential business elsewhere as its reputation took a battering.
In November, Serco cut its 2013 profit expectations and warned that profits in 2014 would be even lower due to the UK contract issues.
In Thursday's statement, the company it now expects its 2013 organic revenues to have fallen by a mid-single digit percentage compared with 2012 as it was hit by a lower amount of incremental work in the wake of its highly-publicised UK government contract issues.
However, the forecast also reflects lower volumes in its Australian immigration contract after the Australian government changed its immigration policy. On a call, Chief Financial Officer Andrew Jenner said the company had seen the volumes it is processing under the GBP400 million contract fall between 25% to 50% year-on-year.
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.
Back in November, Serco had also warned that it was being hit by unfavourable currency movements. Thursday, it said that currency moves had continued to go against it, and would reduce revenues by about GBP50 million and profits by about GBP8 million in 2013.
CFO Jenner said it was particularly being hurt by sterling's recent appreciation against the dollar.
In November, Serco had said it expected organic revenues to grow by a mid-single digit percentage in 2013, while its adjusted operating margin would be slightly down on the 6.4% it reported for 2012. It had predicted that its adjusted operating profit would be at about 2012's level of GBP307 million at constant currencies, with a 1% to 2% reduction caused by the adverse currency moves at that time.
For 2014, Serco said it now expects to book about GBP10 million in costs for its corporate renewal programme and costs of about GBP15 million to pay for external advisors, implementing the programme and initial training and systems set-up. It said it will also book a further restructuring charge of between GBP10 million and GBP15 million for cutting headcount and relate costs.
In December, it had said the bill for external advisers had risen to about GBP17 million, up from GBP12 million previously, while the impact of the audits on the contracts was estimated at up to GBP19 million, up from its previous estimate of GBP15 million.
Thursday, it also said it expects its 2014 adjusted operating margin to be about 50 to 100 basis points below the 2013 margin.
Serco will release its 2013 earnings March 4 and will also give further 2014 guidance at that time.
Acting Chief Executive Ed Casey said he hoped the government's positive assessment of its corporate renewal programme meant the company would now be considered on an equal basis with other supplies in bids, rebids and contract extensions, including a bid for the Northern Rail franchise extension and the Defence Infrastructure Organisation opportunity.
On a call, Casey also highlighted an upcoming rebid on its contract to operate and maintain the Docklands Light Railway and the contract to maintain the RAF Fylingdales ballistic missile warning and space surveillance base for which it hopes to be short-listed.
Serco shares were down 12.1% at 447.5 pence Thursday morning, the biggest decline on the FTSE 250.
By Steve McGrath; [email protected]; @SteveMcGrath1
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