Writedowns show Serco can't outsource troubles

The scale of the challenge facing Rupert Soames at Serco was laid bare yesterday when the outsourcing giant's new boss admitted that it expected to write down the value of some of its largest contracts.

Serco, which operates prisons, healthcare services and London's "Boris Bikes", has been under intense pressure since last year when it was found to have overcharged the Government on contracts for tagging offenders.

Mr Soames, the grandson of Sir Winston Churchill who joined as chief executive from Aggreko in May, said the write-downs would include its Compass programme to provide accommodation and support services for asylum seekers. This contract has already cost the company £15 m since 2012 and he warned that it "may continue to lose money".

Others in the spotlight include a contract with Suffolk Community Healthcare.

Mr Soames warned that between £10m and £15m of provisions could be required to cover the total shortfalls when the company reports its half-year results next month.The shares fell 3.3p to 363p.

Serco has already downgraded its 2014 profit forecast three times and launched a share placing to raise cash. Operating profits are expected to come in at £170m this year.

"Whilst difficulties continue on some contracts, overall our trading and financial position is in line with the expectations on which we updated the market two months ago," Mr Soames said. "We are rebuilding trust and confidence with the UK Government and the strategy review is proceeding according to plan.

"There are many challenges ahead, but I am confident that we can build a strong future for the business."

Analysts at the broker Liberum maintained a hold rating on Serco ahead of Mr Soames' strategic review, the results of which will be unveiled next year. The news has not been all bad: in May it was awarded an £800m contract to run the Caledonian Sleeper service between London Euston and Scotland.

"The only certainty is uncertainty until March 2015," Liberum said.

"If improved prudence restores faith in earnings, and increased focus on return on invested capital improves cashflow, the business may be capable of healing itself. But it will be a long slog."

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