Following a time honoured tradition, Serco served the good news first in its trading update this morning. It expects underlying trading profit (a new metric representing operating profit excluding amortisation, exceptional items and certain charges and releases) to be £95m for 2015, £5m ahead of expectations.
But this titillating amuse-bouche was nowhere near enough to make up for Serco’s stodgy, overdone main course. The troubled outsourcer expects underlying trading profit to be £50m in 2016 – some £19m less than expected. Revenue next year is expected to fall by a fifth to £2.8bn.
Shares duly plummeted as much as 11.5% this morning, to 101.1p – 85% less than their peak in the summer of 2013, before the proverbial hit the fan. That’s what a criminal-tagging scandal, being banned from bidding on government contracts and plastering a £1.5bn impairment all over your balance sheet will do to you.
Serco’s woes ultimately came from overstretch - focusing too much on winning new contracts at the expense of managing ongoing ones and diversifying beyond its expertise. Since Rupert Soames took over as chief executive last year, the strategy has been instead to focus on a smaller number of profitable contracts, slash net debt (a £550m rights issue earlier this year helped) and cut costs.
It’s a painful transition and, apparently, a long one. Serco expects 2016 revenues to be £500m lower and profits to be £40m lower as a result of ‘higher levels of attrition’ in its contracts, adding to the adverse impact from the £250m disposal of its BPO offshore call centre business, which is due to complete in the next few months.
More worrying still was Soames’ line that ‘2016 and 2017 involve much work to rebuild our business pipeline and become more cost efficient’, even if his ‘view of the longer term recovery potential is unchanged’. Not many investors are patient enough to wait until 2018 to see results.
There are some signs that Serco is over the worst, however. It cut £20m from its overheads this year and expects to find another £50m in savings next year. Its net debt meanwhile is set to be about £100m once the BPO sale goes through – down from £682m in 2014. It may take a while, but a smaller, more sustainable business appears to be gradually emerging from the wreckage.