After the travails of 2013, and three profit warnings already this year, it may have been expected that investors in Serco (SRP) would be inured to bad news. But, not so, if Monday's 30 per cent-plus slump in its share price is any indicator of investor sentiment. The outsourcing giant is hoping to find the recovery path under new chief executive Rupert Soames but he has always warned that his root and branch review of the company's strategy and its historical contracts was likely to throw up some nasties, and indeed it has.
Described by Mr Soames as "a bitter pill", the preliminary results of the operating review have resulted in increased charges for impairments against contracts won on wafer thin margins (which have all but evaporated), in addition to restructuring measures for parts of the business that had become dysfunctional. The paper bill is eye-watering at £1.5bn and Mr Soames and his team now also need to engage lenders in discussions on Serco's financial covenants to give management the breathing space to put together what is likely to be a £550m equity fundraising early in 2015.
Having to come to the market for funds to enact the turnaround has clearly spooked some investors, but Mr Soames has been very open since he took over the hot seat in May, that the depth of issues in the business would take some time to turn around and would likely require a cash injection. Today management admitted that the previous regime's prioritisation of contract wins over discipline on margins has resulted in a number of loss making contracts. Of the £1.5bn of impairments and charges identified, around £450m is for 'onerous contract provisions', with a major Australian defence contract the biggest single factor in this amount. But even before the impact of the provisions is calculated, adjusted operating profits are now expected to come in £20m lower than previously forecast this year, at £130m-£140m with next year's outlook also reined in.
