Uncertainties remain 'aplenty' at outsourcer Serco, say analysts

10th Nov 2014 09:57

Analysts showed their disappointment with a poorly-received statement from Serco on Monday, as the outsourcing company announced a profit warning, £1.5bn of write-downs, and a proposed a rights issue.Oriel Securities analysts said the update "provides some colour on the future shape of the group".However, "uncertainties remain aplenty in our view. There are still question marks over forecasts, capital structure and execution", they said, keeping a 'hold' recommendation.Serco, which has been undergoing a strategic review since earlier in the year, said that the reviews have identified likely impairments and further onerous contract provisions of £1.5bn, half of which relate 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.Serco has also proposed an equity rights issue of £550m for the first quarter of 2015 to strengthen its capital structure, and said it would be exiting all its private-sector business process outsourcing activities and focus on becoming a business-to-government outsourcing firm."Today's update underlines the extent of the issues within this business at present," said Andrew Gibb from Investec. "There is a lot to absorb today, but it is important to note this might not be the end of the bad news and that any turnaround is going to be a long process."He said that until the results of the firm's strategic review are clear - due alongside the annual report next March - and details about appetite for the rights issue are known, "it is very difficult to take a firm view on this stock".Investec kept a 'sell' rating on Serco but put its target price under review.Meanwhile, Liberum reduced its target for the shares from 300p to 210p and maintained a 'hold'.Liberum said: "We expect a very negative reaction to today's estimate reductions and rights issue comments. [...] However, it is good to see the new management acting quickly and decisively to get the business back on track."