November 10, 2013 10:28 pm

Serco difficulties spark prospect of profit warning

Serco is set to reveal the cost of corporate embarrassments this week, with analysts forecasting that its problems with contracts for UK prison vans and Australian asylum centres will result in a profit warning.

Analysts at RBC Capital Markets said they expected the FTSE 250 outsourcing group to report full-year profits of about £314m on Thursday, down from a consensus estimate of £325m. They also forecast that profits will be about 10 per cent lower in 2014, and 19 per cent lower in 2015.

A profit warning would cap a turbulent year for Serco, which employs 122,000 staff in 30 countries running air-traffic control towers, prisons, and hospitals worldwide. The outsourcer is still searching for a new CEO at the same time as facing a freeze on new UK government work as a punishment for alleged contract failures.

Earlier this year, Serco was hit by the government shutdown in the US, where it is heavily dependent on federal work, and will have to bid again for several contracts, including one with US Space Command.

In addition, analysts warn that a change of government in Australia could lead to a scaling back of its five-year deal to manage onshore detention centers for the Department of Immigration and Citizenship, which contributed about 8 per cent of first-half revenues and is its largest contract. Tony Abbott, the new Australian prime minister, has pledged to stem the flow of asylum seekers and move them to facilities abroad. Last year, Serco earned about 17 per cent of sales from Australia and 14 per cent from the US.

In the UK, Serco faces an uphill struggle in its attempts to repair its damaged relationship with the British government. Last week, the UK’s Serious Fraud Office confirmed that it would proceed with an investigation into Serco and rival G4S for allegedly overcharging taxpayers tens of millions of pounds for the electronic tagging of offenders.

Serco was already under investigation by the City of London police for the alleged altering of records on another contract involving the transport of prisoners in the southeast of England.

As well as reputational damage, Serco will take a take a direct financial hit on the two contracts. The company has pledged to repay all past and future profits on the contract to run prison vans for seven years. It won the deal in 2011. It has also agreed to reimburse the government for any over-billing on electronic monitoring contracts.

In August, the UK government gave Serco three months to carry out a programme of “corporate renewal”. One-quarter of the company’s £4.9bn annual revenues come from work with the UK government.

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