Serco Group PLC share price plummets, announces rights issue after a fourth profit warning for the year

Serco Group PLC reduced its full-year profit target as it announced a £550-million rights issue and identified £1.5 billion of likely impairments and charges.

The company, which provides outsource services to governments such as managing the custody of prisoners, said in an unscheduled announcement that it now expects full-year operating profit to be between £130 million to £140 million, a £20 million decrease from its latest forecast. Serco also lowered its outlook for 2015.

As a result of the lower full-year profit, Serco will breach its debt-to-profit covenant on a private placement loan. The company stated its plans to hold discussions with the lender to negotiate the conditions.

After the companys fourth profit warning for the year and the introduction of a plan to cancel final-year dividend payouts, Serco lost more than a third of its value.

The £550-million rights issue is expected in the first quarter of 2015 and is fully underwritten by Bank of America, Merrill Lynch and J.P. Morgan Cazenove.

Around £750 million of the planned impairments and charges are related to goodwill and intangibles assets and approximately £450 million for onerous contract provisions, “of which a significant proportion will have associated cash outflows over the next eight years” stated the company.

Serco said it would switch its focus to providing government services rather than private contracts as it introduced a plan to dispose businesses not core to its future strategy, including the majority of its private sector BPO business.

CEO Rupert Soames said that the findings of the strategy, contract and balance reviews were a “bitter pill”, but added: “It is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco’s future.” The company said its full conclusions of the strategy review will be announced together with its full-year results in March 2015.

The company said that the largest revision of estimates was related to its contract with the Australian Defence Materiel Organisation for the maintenance of navy patrol boats. After a further engineering-led review, Serco re-estimated the costs associated with the contract and now expects them to be around £150 million.

Serco Group PLC lost 0.72% on Friday and closed at GBX 317.10 in London. On Monday the stock plummeted 30.61% to trade at GBX 220.07 at 11:24 GMT, marking a one-year decrease of 59.10%. The company is valued at £1.74 billion based on Fridays close. According to the Financial Times, the 17 analysts offering 12-month price targets for Serco Group PLC have a median target of GBX 300.00, with a high estimate of GBX 350.00 and a low estimate of GBX 240.00. The median estimate represents a -5.39% decrease from the previous close of GBX 317.10.