UPDATE 2-Embattled UK outsourcer Serco warns on profits again

Thu Jan 30, 2014 8:20am EST

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(adds CEO comments)

By Neil Maidment and William James

LONDON Jan 30 (Reuters) - Britain's Serco said 2014 profit could be as much as 20 percent below forecasts, a sign that the cost of rebuilding the outsourcing group from high-profile government contract failures is continuing to take its toll.

The warning came minutes after Serco's biggest client, the British government, said it had decided to allow the firm to once again win new work, ending a six-month hiatus after Serco, along with rival G4S, charged for tagging criminals who were not being monitored, in prison or dead.

After a brief rally, shares in Serco, which runs services from London's light railway to the maintenance of nuclear weapons, slumped 15 percent on the disappointing guidance, wiping 340 million pounds off its value.

In total, it has lost 1.2 billion pounds, or just under a third of its market value, since the initial scandal broke in July. Since then Serco's woes have been compounded by related police inquiries, allegations of fraud on a prisoner-escorting contract and a cabinet review of all its government contracts.

To win back the faith of the UK government, whose work makes up a quarter of group revenue, Serco has ditched its UK and group chief executives, committed to strengthening its board and ethics and is restructuring part of its business in response to a call from the government for "corporate renewal".

The government said on Thursday Serco's actions, which include last month's agreement to refund 68.5 million pounds to Britain's Justice Ministry for the tagging contract, meant it was now headed in the right direction.

However, in what should have been a good news day for the troubled firm, Serco then released a statement detailing the overall impact of a period that has rocked the company and increased scrutiny on an industry already in trouble after G4S failed to provide enough guards for the 2012 Olympics.

"We have been through a very difficult period since July of last year, which has had a major impact on Serco: reducing near-term growth, diverting management focus, and adding costs to strengthen the business," acting Chief Executive Ed Casey said. "We are now able to assess more clearly the adverse impact that continues into 2014."

10-20 PERCENT DIP IN 2014 PROFIT SEEN

Serco said 2014 adjusted operating profit could now be 10-20 percent lower than analyst forecasts of 277 million pounds. That comes after the contract problems contributed to Serco lowering 2013 profit guidance in November, and firing an early warning sign that 2014 numbers would come under pressure.

The group said attrition from lost contracts, volume reductions in its Australian immigration detention services contract and less work won across the group in general would result in 2014 revenue falling by a mid-single digit percentage.

Higher ongoing costs, of about 10 million pounds a year, to overhaul the business would hit 2014 operating profit, it added, while margins would be squeezed by the costs of the renewal programme and by lower revenue. Currency movements were also becoming an increasing problem, Serco said.

Casey told Reuters that the firm was in the "very late stages" of appointing a new group CEO, with an announcement expected in the near term on a replacement for Chris Hyman, who led Serco for more than a decade before quitting in October.

The government's approval for Serco to start winning work once more had been widely expected. Serco said it now expected to compete with rivals for work such as the Northern Rail franchise extension and a defence contract expected to be awarded in Feb.

G4S is yet to prove its own "corporate renewal", is still in talks over the size of the refund on the tagging contract and is therefore yet to get the green light to be able to win new work.

($1 = 0.6041 British pounds) (Editing by Kate Holton and Paul Sandle/Mark Heinrich)

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