Described by acting chief executive Ed Casey as "the toughest year in Serco's (SRP) 25-year history", these results were never going to be pretty. It was a year marred by an investigation into overcharging for prisoner-tagging contracts, which triggered a blanket ban on new UK central government deals. "The UK issues have had a significant impact on our business and our financial performance," says Mr Casey. A £90.5m net exceptional charge to cover a settlement with the UK government for the prisoner-tagging contract and a further £21m of costs associated with a wide-ranging review into other government commitments sent profits tumbling. Group operating profit fell 45 per cent at constant currencies to £144m, while free cash flow of £84.8m was less than half the 2012 total.
A review by the UK government into contracts held by Serco has been completed and the group can now rejoin the bidding table. But the group is not quite out of the woods. The impact of UK work lost as a result of the issues will linger, and Serco is also facing difficulties in Australia, where a change in government immigration policy is hitting volumes on what is the group's largest active contract. Mr Casey is now guiding for a mid single-digit organic decline in revenue this year and a 50 to 100 basis point drop in the adjusted operating margin. One plus point is that the guidance is unchanged since January's update.
Amid all the gloom, there is a ray of hope in the shape of a new chief executive. Just prior to the results, Serco announced that it had poached Aggreko's (AGK) highly regarded chief executive Rupert Soames, who will take the helm in June. Investors will be hoping he can rebuild the company's reputation and capitalise on what Mr Casey says are Serco's "fundamentally attractive markets", driven by the continued outsourcing of public services.
Investec expects adjusted pre-tax profit of £161m and adjusted earnings per share of 25.7p this year (from £254m and 39.5p in 2013).
| SERCO (SRP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 465p | MARKET VALUE: | £2.3bn | |
| TOUCH: | 465-466p | 12-MONTH HIGH: | 689p | LOW: 392p |
| DIVIDEND YIELD: | 2.3% | PE RATIO: | 24 | |
| NET ASSET VALUE: | 219p* | NET DEBT: | 68% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 3.97 | 177 | 26.8 | 6.25 |
| 2010 | 4.33 | 214 | 31.9 | 7.35 |
| 2011 | 4.65 | 238 | 35.7 | 8.4 |
| 2012 | 4.91 | 281 | 48.9 | 10.1 |
| 2013 | 5.14 | 107 | 19.5 | 10.55 |
| % change | +5 | -62 | -60 | +4 |
Ex-div: 12 Mar Payment: 14 May *Includes intangible assets of £1.46bn, or 292p a share | ||||
