Serco warns on profits after UK public sector delays - UPDATE

14th Nov 2013 09:47

- FY profits guidance lowered to flat YoY- Currency effect another 1-2 per cent- FY 2014 also expected to be lowerSerco Group's shares tumbled as the service company warned profits would be hit by contract delays with the UK government and currency movements.Issues with the company's contracts with the Ministry of Justice, after the group was investigated due to suspected overcharging on its electronic tagging contract and problems with its prisoner escort services, have put additional pressures on margins since June 30th.The firm's results have also been hurt by lower level of discretionary spending and ad hoc project work with UK government customers as these investigations harm its reputation. The company said it expected group adjusted operating profit at constant currency to be broadly similar to 2012's £307m from ongoing activities, compared to consensus of about £325m."Taking into account recent currency movements, it is estimated that the net adverse impact of such movements would further reduce profits by approximately 1-2%," the company said. Revenue is also expected to be impacted by the recent immigration policy changes on the volume-related work for the Australian Department of Immigration and Border Protection (DIBP), formerly the Australian Department of Immigration and Citizenship (DIAC). DIBP contract revenues, which have averaged approximately £400m for the last 12 months, may decline significantly in 2014, the company said.Profits for 2014 are also expected to be moderately lower than 2013.At the end of June, Serco had an £18.5bn order book and the pipeline of identified opportunities around the world had a total estimated value of £30bn. Since then the company has been awarded a further £0.9bn of contracts, bringing the total for the year to date to £3bn, comprising signed contracts valued at £2.9bn and preferred bidder appointments valued at £0.1bn. Broker Investec was one of several to downgrade the company, slapping a 'sell' on the shares due to "too much uncertainty"."Contract issues relate to its UK Government work show no signs of being resolved, implying further downward pressure on volumes, and margins. Despite today's cuts, this may not be the end to the downgrade trend, given a new CEO is still to be appointed." Shares in Serco continued to track lower, sliding down 14.1% to 433.1p by 12:55 on Thursday. RD