Tough past and year ahead for Serco

<p>Serco’s shares went up around 3.7% (at time of writing) following the release of its full-year results for 2013. It wasn’t great but the market […]</p>

Serco’s shares went up around 3.7% (at time of writing) following the release of its full-year results for 2013. It wasn’t great but the market had perhaps expected much worse following recent issues in Serco’s UK government business. Not to mention the series of recent profit warnings from the outsourcing company.

The UK-based company reported a 5.6% increase in revenue at £4.29mn; and pre-tax profit came in at £106mn, a notable 62% decline versus 2012 figures.

As a reminder: the Serious Fraud Offices launched a criminal investigation last year, based on allegations that Serco (along with competitor G4S) were overcharging for electronic tags for criminals.

The drag on Serco’s latest results was partially down to a £90.5mn charge – partly to cover the electronic monitoring settlement with the Ministry of Justice. Serco also allocated £21mn in expenses in relation to the UK government reviews.

Furthermore, the company warned of further near-term challenges.

Serco anticipates a challenging 2014, partly driven by reduced work in Australian immigration services, together with lower growth from new contracts. As a result, the company reiterated expectations of a “mid-single digit” decline in organic revenue for 2014.

To be fair to Serco, its latest announcement wasn’t all doom and gloom.

In the face of a temporary ban from bidding for UK central government work (the ban was lifted in January) Serco still managed to grow organic revenue in its UK and Europe business by around 3%. That’s slightly higher than growth in that business the year before.

Still, the company’s performance lags that of competitor Capita. Indeed, Capita’s growth story was recently highlighted here following its latest market update. And it was noted at the time that the company, in contrast to its some of its rivals, looks poised to continue to deliver.

The same can’t be said about Serco, certainly not in the short-term, as it continues with efforts to overcome the lingering ramifications of last year’s events.

It can be said, however, that soon-to-be CEO, Rupert Soames (set to take the helm on June 1st), has his work cut out in terms of further repositioning the company for good growth.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.