UPDATE 1-Serco flags profit downgrade, may sell new shares

Mon Apr 28, 2014 2:46pm EDT

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By Neil Maidment

LONDON, April 28 (Reuters) - British outsourcing firm Serco warned it could downgrade its profit expectations and was considering issuing new shares to shore up its finances after its performance this year had been worse than expected.

Serco warned in January that profit this year would be lower than last due to underperforming contracts and the cost of issues relating to it overcharging the UK government on a contract to tag criminals.

The scandal rocked the firm, sparking a ban on new government work, the exit of its long-serving chief executive Chris Hyman, a profit fall and a steep drop in its shares.

"It has now become evident in the light of recent performance that we may need to reassess the level of risk implicit in the assumptions underlying our forecasts," Serco said on Monday.

"This may in turn require a material downward revision to expectations, and for us to review the appropriateness of our financing position. We will, therefore, be consulting with shareholders regarding the possibility of strengthening the balance sheet through an equity placing," the company said.

While the February appointment of Rupert Soames as Serco's new chief executive cheered investors, many analysts have been expecting more bad news due to challenges of turning the company around, such as rebuilding its reputation, handling underperforming contracts and winning new work.

The group's adjusted pretax profit of 254.4 million pounds for 2013 missed forecasts and it warned in January that 2014 profit would be lower again, with revenue and margins both set to fall.

Prior to Monday's announcement analysts on average had been forecasting a 2014 pretax profit of 183.51 million pounds, according to Reuters data.

Market participants had also speculated about the possibility of Serco raising new cash to strengthen its balance sheet, with the company's net debt forecast to rise above its target 2.5 times earnings this year.

The group's net debt to EBITDA ratio was 2.3 times in 2013, versus 1.5 times in 2012.

Serco said it would make a further announcement this week.

Shares in the firm, which employs over 100,000 staff in some 30 countries running services from London's light railway to air traffic control towers in the United States, closed at 404.5 pence on Monday before the announcement was made, down 34 percent on a year ago. (Reporting by Neil Maidment; Editing by Erica Billingham)

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