Serco still on the back foot

"The first time in living memory that Serco (SRP) lost money," was how chief executive Rupert Soames described these results. First-half revenues were roughly flat at constant currency, but reduced profitability, restructuring costs and provisions dragged the group to a pre-tax loss.

The outsourcing group did at least meet the revised guidance set just before Mr Soames came on board in May and is sticking to its forecast that adjusted operating profit for the full year will be not less than £170m. With adjusted operating profit of only £50.7m in the first half, that leaves a lot still to do. Broker Investec Securities is expecting adjusted earnings per share of 15.6p for the full year, down from 39.5p in 2013.

Serco won £2.5bn in new contracts in the first half with the largest being the £800m Caledonian Sleeper rail contract. But the group's contract win rate was described by management as "very disappointing". At the start of this year, Serco had a pipeline of around 40 major opportunities. So far this year, the group has lost eight of those and won only two. Serco estimates the total value of new larger bid opportunities over the next two years to be £8bn. That's down a third from six months ago.

Management puts the disappointing win rate and diminishing pipeline down to reputational damage and internal disruption caused by the fallout from the UK government's prisoner tagging contract debacle. It says that improving the win rate and rebuilding the contract pipeline are a priority.

Mr Soames is part-way through a strategic review into all the group's contracts and there were no major revelations at this stage. But he did say that a revamped management team, strengthened balance sheet, together with cost-cutting, were important steps on the "long journey" to recovery. Mr Soames will report the strategic review's findings, which could potentially include further write-downs, in full at Serco's preliminary results next March.

TOUCH:341-342p12-MONTH HIGH:626pLOW: 313p

Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
% change-4-- 

Ex-div: 3 Sep

Payment: 17 Oct

*Includes intangible assets of £1.4bn, or 262p a share

IC View

Trading on 22 times forward earnings, the shares are clearly pricing in some kind of earnings recovery. But that recovery remains shrouded in mist at present with the potential for more unpleasant revelations in the near term as the group's multitude of contracts are examined. We won't get a clear picture of the 'new' Serco's earnings profile until the strategic review is completed. That leaves the shares best avoided for now. Sell.

Last IC view: Sell, 352p, 6 Aug 2014

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