April 28, 2014 8:19 pm

Serco issues profits warning

Serco, the scandal-hit outsourcing company, has issued a profits warning and signalled that it might have to raise capital through a share placing – just days before its new chief executive takes up his role.

The FTSE 250 group – which runs prisons and welfare to work programmes for the British government, and the London’s Docklands Light Railway in London – had already reported that its pre-tax profit fell 62 per cent last year, to £106m, and its 2014 profit would be even lower.

But, with Rupert Soames – the grandson of Winston Churchill and former chief executive of Aggreko – due to take over the running of Serco on May 1, the company took the unusual step of issuing a profit warning after the London Stock Exchange closed on Monday.

“It has now become evident in the light of recent performance that we may need to reassess the level of risk implicit in the assumptions underlying our forecasts,” the company said.

“This may in turn require a material downward revision to expectations, and for us to review the appropriateness of our financing position. We will, therefore, be consulting with shareholders regarding the possibility of strengthening the balance sheet through an equity placing,” it added.

Serco has been hit by a series of scandals surrounding the mishandling of UK government contracts, ranging from the manipulation of data for out-of-hours healthcare services to charging taxpayers for electronically tagging prisoners who had died. Although the company has been cleared to bid for future government contracts, it remains under investigation by the Serious Fraud Office.

Stephen Rawlinson, analyst at Whitman Howard, said the profit warning created uncertainty for investors, as both the expectations for 2104 and the rights issue “are unquantified”.

“This leaves investors with little guidance on which to make a decision in the short term – raising the prospect of the shares being suspended until there are fewer uncertainties.

“Our view is that Serco has some very good contracts and clearly some poor ones. But it is impossible to know on this information the size of the problem and the amount of equity needed. This creates significant uncertainty for investors, customers and employees which will require all of the skills of Rupert Soames to put right.”

Analysts suggest a fundraising of at least £500m will be required and that the company will be forced to write off loss making contracts.

Two of Serco’s rivals – G4S and Capita – have had to raise capital through rights issues over the past year.

Shares in Serco – which employs 120,000 staff in 30 countries – have fallen 19.4 per cent so far this year. They closed on Monday at 404.65p a share, before the stock exchange announcement.

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