Serco ship steadied after escape from costly Australian Navy deal

The contract to maintain some 20 Armidale-class patrol boats had been due to run until 2022 

Nick Goodway
Tuesday 10 November 2015 01:38
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Armidale-class boats have ‘major design flaws’, according to Serco
Armidale-class boats have ‘major design flaws’, according to Serco

Almost exactly a year ago, Rupert Soames, the chief executive of Serco, announced a huge rights issue intended to put the battered outsourcing giant back on track. Now he has dramatically cut the cost of extricating Serco from an onerous contract with the Australian navy.

The contract to maintain some 20 Armidale-class patrol boats – used partly to patrol coastal waters looking for migrant vessels – had been due to run until 2022 but will now be ending in 2017.

Last year, Serco made a provision of £136m against the contract under Mr Soames’s “onerous contract provision” review of the business, which it said reflected future losses. It also added a further £66m to reflect the writedown in value.

At the time it said there were “major design flaws” in the Armidale boats, with “corrosion and cracking” needing major repair work.

Serco said yesterday that it had negotiated a deal with Australia’s government, which meant the contract would end sooner but that the company would provide improved service and maintenance standards until then.

“We are pleased to have reached a mutually beneficial agreement with our customer on this matter,” Mr Soames said. “Today’s amendments represent an equitable solution for both parties. We remain absolutely focused on delivering the highest standard of operational performance on this challeng- ing contract.”

Analysts said they reckoned that Serco had reduced the cost of the Armidale contract costs by around £50m of the original £136m it had provided.

The company said it would not change its guidance for 2015 trading profits of about £90m, but it would improve future cash generation. That boosted the shares by 5 per cent, or 5.45p, to 104.8p.

Since Mr Soames arrived in May 2014 from Aggreko, Serco’s share price, which had been hammered by a series of largely public-sector contract scandals, has fallen by 60 per cent.

In March it raised £556m through a heavily discounted rights issue. This came as it reported £1.4bn losses for 2014 after writing down a slew of contracts, including the public sector ones with the UK government.

This year the group has endured a fall in revenues partly because of losing the Docklands Light Railway contract, lower income from its Australian Immigration Service business and reduced activity on its IT contract with US intelligence services.

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