Shares in Serco battered after Soames warns of pain

Shares in Serco plunged by almost a third. Picture: PA

Shares in the firm – which recently won a 15-year contract to run the Caledonian sleeper train service between Scotland and London – plunged by almost a third after it slashed its profits guidance for this year and next and wrote down the value of the business by £1.5 billion.

Soames highlighted the impact of several contracts where Serco is making large losses and reiterated that he wants to re-focus the company as being a provider of services to governments in areas such as justice and immigration, defence and transport, while looking to sell the majority of its business outsourcing operations.

Among the operations being put up for sale is the group’s Great Southern Rail business in Australia.

The turnaround plan will be financed by a £550 million cash call to investors early next year, on top of the £165m raised in a share placing this summer.

Soames warned that Serco will have “to get smaller and more focused” to get back on track.

He added: “Whilst it is a bitter pill, it is better for all concerned that we swallow it now.”

Soames took the helm in May after a year in which Serco was forced to refund the UK government £68.5m for overcharging on criminal tagging contracts, as well as repay £2m of past profits from a prisoner escorting contract.

In the latest downgrade to profits guidance, Serco now expects a figure of between £130m and £140m this year, against a previous forecast of not less than £155m. It also lowered estimates for next year.

Confronted by slowing growth rates and increased competition in core markets, Soames said Serco had concentrated too much on winning new business and lost focus by diversifying into areas that required different skills. He said: “This transformation will take time, but will be worthwhile.

“The next two years are going to be difficult, and we expect our revenue to reduce over this period through disposals and exiting loss-making contracts, following which we expect to be able to start growing again.”

Whitman Howard analyst Stephen Rawlinson said Soames and his new top team had “bitten the bullet and revealed the full extent of over-optimistic accounting and strategic blunders”.

However, Andrew Gibb at Investec said that, until the full details of the review are known, “it is very difficult to take a firm view on this stock”.

He added: “Management are doing the right things, but this is going to be an expensive and long-term turnaround with risks still ahead.”

Shares closed down 32.2 per cent, or 102.1p, at 215p.

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