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UPDATE 2-Serco slumps as turnaround faces political uncertainties
February 22, 2017 / 9:28 AM / in 10 months

UPDATE 2-Serco slumps as turnaround faces political uncertainties

(Adds CFO, analyst comment, shares)

By Elisabeth O‘Leary

EDINBURGH, Feb 22 (Reuters) - Shares in Serco slumped on Wednesday after results from the British outsourcing group showed it may be tough to boost sales in an uncertain political climate and that the company’s recovery could take longer than some analysts expected.

Serco, which provides transport, health, justice, defence and security services in public departments and gets half of its revenues from the UK, left its 2017 outlook unchanged versus an update given in December. It reported a 14 percent fall in trading profit for 2016 in line with its December outlook.

The group, restructuring after a string of profit warnings, said it could still be hit as its low-margin contracts had little ability to absorb any additional demands or changes from government customers.

Serco’s Chief Financial Officer Angus Cockburn told analysts a profit margin of about 2.7 percent of sales in 2016 would fall to 2.1 to 2.3 percent in 2017 and rise modestly in 2018.

It will take until then for a full recovery after a series of one-offs and writedowns as part of an overhaul started in 2014, he said.

“Until we get that revenue line growing again we have to paddle very fast just to stay still,” Cockburn said.

Serco’s shares were down 14 percent at 126.9 pence at 1051 GMT, having outperformed most of the group’s rivals so far this year with a rise of 3 percent to date.

Britain’s outsourcing sector has been hit in recent months by uncertainty created by the country’s vote to leave the European Union, causing delays to contract decisions.

Serco’s results showed the group was still awaiting key contract wins, analysts said, with several big opportunities to be decided this year, including one to run fire and rescue services in Britain and a Middle East rail contract.

Serco’s CEO Rupert Soames said political uncertainty would be a factor both in the United States and Britain this year.

“Governments can be very capricious, they can change their minds and elections come along and at any one time we have some great political uncertainties looming over us, be that in the U.S. or issues with Brexit in the UK,” Soames told Reuters.

“But Australia is strong and the Middle East is strong.”

Analysts at Liberum said the company’s recovery was “taking a little longer” than it had hoped, and cited risks on Obamacare (the Affordable Care Act) in the United States, where Serco runs benefits eligibility testing. Liberum cut its recommendation to “sell” from “hold”.

Soames told an analyst meeting that while it seemed clear that the new U.S. administration would get rid of the current health system, no one was clear what would replace it.

The ACA, which accounts for one third of Serco’s U.S. revenues, comes up for a last extension year in June. Soames said it was too soon to say if it would have to take a charge on the work if it was discontinued. He also said there were other major opportunities in the United States in defence under the new administration.

Underlying trading profit in the year to December fell to 82 million pounds ($102 million), while order intake was up 40 percent in the year.

The pipeline of new bid opportunities ended the year at 8.4 billion pounds, up 30 percent.

$1 = 0.8004 pounds Reporting by Elisabeth O'Leary, Editing by Kate Holton and Jane Merriman

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