Serco planning rights issue after £1.5bn write-down and profit warning - UPDATE

10th Nov 2014 07:54

Under-pressure outsourcing group Serco has delivered a profit warning to investors and said it is planning a rights issue after writing down the value of its business by £1.5bn.The company also announced it would also exit all it private-sector business process outsourcing (BPO) activities and focus on becoming a business-to-government (B2G) outsourcing firm, specialising in justice and immigration, defence, transport, citizen services and healthcare. Contract and balance-sheet reviews have identified likely impairments and further onerous contract provisions of £1.5bn, half of which relates to goodwill and intangible assets.However, even before the impact of these impairments, the company said forecasts for 2014 adjusted operating profit have been cut by around £20m to £130-140m.Adjusted operating profits are expected to fall further to around £100m in 2015.The stock shed as much as a third of its market value in early trading on Monday.Regarding the impairments, chief executive Rupert Soames said: "Whilst it is a bitter pill, it is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco's future."He said that the reviews have "encouraged much turning over of stones" and revealed challenges that the company faces on a few large contracts."These challenges, together with a less pronounced improvement in trading in our second half than we expected, have led us to a more cautious view of 2014 and 2015," Soames said.Serco has proposed an equity rights issue of £550m for the first quarter of 2015 to strengthen its capital structure.The company has still now completed its strategic review announced earlier in the year, and the results should be out alongside its full-year results in March 2015.The stock was down 29% at 225.4p by 08:54.Analysts at Oriel Securities kept their 'hold' rating on Serco following Monday's news, saying: "Whilst today's strategy update provides some colour on the future shape of the group, uncertainties remain aplenty in our view."There are still question marks over forecasts, capital structure and execution."