March 12, 2015 / 8:30 AM / 5 years ago

UPDATE 2-Shares in Serco slump as it raises cash for recovery

* 2014 Trading loss of 632 mln pounds

* Cautious outlook beyond 2015

* 555 mln pound rights issue launched

* Shares down 16 pct (Writes through, adds quotes)

By Neil Maidment

LONDON, March 12 (Reuters) - British outsourcing firm Serco on Thursday launched a 555 million pounds ($831 million) rights issue after a spectacular profit collapse and said it was unlikely to return to sales growth for another three years.

Serco’s shares fell as much as 16 percent as analysts’ hopes for a smaller cash call were dashed and the company’s more cautious outlook beyond 2015 rattled investors. Its shares are down 61 percent on a year ago.

The group, undergoing a major overhaul after a string of contract problems and scandals, reported a 2014 trading loss of 632 million pounds, compared to a 2013 profit of 257 million.

Revenues fell for the first time in 25 years due to lost contracts, fewer new deals and falling margins, while loss-making contracts and asset write-downs forced a 1.5 billion pounds impairment charge.

“We are leaving 2014 behind us without a tearful glance over our shoulder,” Chief Executive Rupert Soames, poached from Aggreko last year, told Reuters, saying the company was now ready to start on the path to recovery.

Serco’s troubles have included problems with government contracts, including overcharging the British government for monitoring criminals, plus escalating costs on a deal to provide accommodation to UK asylum seekers.

A review of Serco’s 700 contracts, launched by Soames last year, found that the group’s emphasis on winning government work to fuel sales growth had come at the expense of margins, meaning a string of deals now operate at a loss.

His turnaround plan centres on a slimmed-down business focused on contracts with governments at home and in the Middle East, Australia and U.S. but with a much stricter approach to return on investment.

Private sector businesses, such as its Indian arm, are being sold, with final bids expected in April, according to sources.

But the recovery will be a slow process.

“It remains the case that for those willing to look far enough out to fully recovered margins, there is likely to be value, however, this remains a very long-dated equity story,” Exane analysts said.

Serco maintained guidance for a return to a profit of 90 million pounds in 2015, but the dividend was scrapped.

Soames told Reuters that revenues were unlikely to grow over the next three years as margin improvements would be offset by the impact of asset disposals, expiring contracts and less new work won. The group’s bid pipeline has more than halved from 12 billion pounds in 2013 to 5 billion pounds at the end of 2014.

Serco said its rights issue, which aims to raise money from existing shareholders, would be priced at 101 pence a share, a 51 percent discount to Wednesday’s close, with the proceeds used to reduce borrowings. Its debt at the end of 2014 was 682 million pounds, 3.4 times core earnings. Serco expects this to fall to two times core earnings following the rights issue, before disposal proceeds.

$1 = 0.6675 pounds Editing by Kate Holton and Jane Merriman

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