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

Serco Group Plc, the operator of London’s Docklands Light Railway, reported revenue that beat estimates and said it’s delivering on a plan to improve controls after being punished for mishandling government work.

Adjusted sales rose 5.7 percent last year to 5.14 billion pounds ($8.58 billion) at constant exchange rates, Serco said today in a statement. That beat the average analyst estimate of 5.08 billion pounds. Even so, 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.

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’s plan to strengthen oversight had “a positive assessment” from the Cabinet Office at the end of January as the company made changes to operations and management that helped repair its reputation.

Serco won an expansion to its Thameside prison contract and prevailed in bidding for a services contract at Fylingdales, a Royal Air Force facility, interim Chief Executive Officer Ed Casey said in an interview. “This is evidence we’re moving forward and beyond some of the troubles that we’ve had.”

Stock Rebound

Serco shares 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 on June 1 from Casey, who has led Serco since Christopher Hyman resigned last year amid the government inquiry.

The stock was up 2.4 percent to 460.40 pence as of 10:24 a.m. in London today, paring the 12-month decline to 20 percent.

Serco will “return to growth in what remain fundamentally attractive service markets around the world,” Casey said. The U.K. dispute last year undermined Serco’s ability to win private-sector services contracts, and that segment has been returning to “normal operations” since January, he said.

Serco repaid the British government about 68.5 million pounds because of the scandal. The company will have a charge of 10 million pounds to 15 million pounds this year for costs related to further workforce reductions, it said today. One-time costs of the “corporate renewal program” are estimated at 15 million pounds.

BOE Veteran

The company appointed three new non-executive directors yesterday, including former Bank of England Deputy Governor Rachel Lomax, 68, who will head a new Corporate Responsibility Committee in charge of ethical and governance supervision.

“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 today’s statement.

In Australia, where Serco manages immigration centers, 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. The Australian authorities extended their contract with Serco for six months until the end of 2014.

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

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