Serco Forecasts Slower Growth Amid Recovery From U.K. Dispute

Serco Group Plc (SRP), the U.K. services company that transports prisoners and operates London’s Docklands Light Railway, predicted that sales will drop this year after it was punished for mishandling government work.

Slower growth in new contracts and “above average” losses of existing work will probably lead to a mid-single digit percentage decline in organic revenue in 2014, the Hook, England-based company reiterated today in a statement. Sales rose 6.7 percent last year to 4.29 billion pounds ($7.16 billion) at constant exchange rates.

Britain’s largest government outsourcing provider was barred from consideration for certain public contracts last year after overcharging for electronic tagging of criminals, including some who had died. Serco won no work from the U.K. central government in the seven months through January. Its plan to strengthen controls had “a positive assessment” from the Cabinet Office at the end of January.

“The events of 2013 absorbed management’s focus and, therefore, interrupted the normal process of improving efficiency and developing our business into new areas,” interim Chief Executive Officer Ed Casey said in the statement. Serco will “return to growth in what remain fundamentally attractive service markets around the world.”

Stock Recovery

The stock rose the most in more than a decade on Feb. 28 after the company appointed Rupert Soames as CEO. Soames, currently chief of Aggreko Plc, the world’s largest supplier of mobile power generators, will take over from Casey on June 1. Casey has led the company since Christopher Hyman resigned last year amid the government inquiry.

Serco shares advanced 0.9 percent to 453.70 pence as of 8:21 a.m. in London, paring the decline over the past 12 months to 22 percent. The FTSE 350 Index, which includes Serco, rose 1.2 percent as stocks rebounded after Russian President Vladimir Putin ordered some troops back to bases after military exercises near Ukraine.

Serco repaid the British government about 68.5 million pounds because of the scandal. In Australia, where Serco manages immigration centers, its business is under pressure as the company may lose as much as 9 percent of its revenue if Prime Minister Tony Abbott fulfills his pledge to stop the flow of asylum seekers arriving by boat.

Business in the U.S. has “broadened successfully” with new contracts, Serco said today. The total order book was valued at 17.1 billion pounds at the end of 2013.

The services provider expects adjusted operating margin this year to drop by 50 basis points to 100 basis points after declining by 68 basis points in 2013 to 5.6 percent.

“It is essential that we take the steps now that are necessary to put Serco onto a sound basis for future growth, even if to do that means a degree of reversal of past growth,” Chairman Alastair Lyons said in the statement.

To contact the reporter on this story: Morgane Lapeyre in London at mlapeyre@bloomberg.net

To contact the editor responsible for this story: David Risser at drisser@bloomberg.net

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