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Troubled outsourcers G4S and Serco deliver mixed bag of results

Derek du Preez Profile picture for user ddpreez August 12, 2014
Summary:
While G4S has managed to make a strong comeback in the six months to June, Serco is still suffering losses from an extensive restructuring programme.

Last year was a difficult year for outsourcers G4S and Serco, to say the least. Both were banned from bidding for government projects in the UK (although

Businessman having money problems
this has since been lifted) and are still under investigation from the Serious Fraud Office for overcharging on a Ministry of Justice contract.

The controversy resulted in a huge backlash from the public, media and senior civil servants, which in turn badly hit the companies' share prices and reputation alike. The Secretary of State for Justice Chris Grayling issued firm words to the outsourcers and said “the taxpayer must know that their money is being properly used”.

It was the first time the UK government has taken steps to ban suppliers, albeit briefly, from government contracts – and so G4S and Serco quickly realised that they had got themselves into some serious trouble and could not bury their heads in the sand over the debacle. Both scrambled to announce corporate renewal plans to rebuild confidence and heads rolled right at the top of the corporate ladder at the companies.

So, as both firms released their first major set of results this week since the restructures and new hires came on board, how are Serco and G4S progressing? It's very much a tale of two stories.

First up is G4S, which has this week reported a pre-tax profit of £85 million for the six months to the end of June. This compares with a loss of £94 million just a year ago. And although G4S had to repay the UK government a whopping £109 million over the over-charging scandal, the firm has won £1.2 billion worth of new contracts in the first half of the year.

It also said that it has performed well in regions outside of the UK, including North America, where it saw revenues grow by 4.2%, and in Latin America, where its revenues grew by 12.8%. Shares in G4S jumped 3% on the London Stock Exchange following the news.

Ashley Almanza, the company's group CEO, was pleased with the results but said that G4S should not become complacent. He said:

The group made good progress and delivered a satisfactory financial performance in the first six months winning new contracts with a total value of £1.2 billion and producing a 13.2% increase in earnings. There remains much to be done to capture the full potential of our strategy and to strengthen the group’s performance.



While this may be true, it has to be said that the current outlook for G4S is quite strong and it seems that the investments in the restructure and the selling of 15 of its firms are doing the trick, which will no doubt please investors. However, on the surface of it, Serco seems to be a bit further behind its scandal-hit counterpart on the road to recovery.

The corporate renewal costs and some loss-making contracts meant that in Serco's half year results it suffered a pre-tax loss of £7.3 million, a whopping fall of 107% compared to last year. Serco said that the loss was the result of a one-off charge of £29.4 million, due to restructuring costs, but that it did have a pipeline of 40 business opportunities coming through.

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Serco's new CEO Rupert Soames didn't sugar coat the results. He said:

As expected, trading was poor in the first half. Profits were in line with our revised expectations, and cash flow and net debt were better. We are making good progress with our Strategy Review, and in rebuilding trust and confidence with the UK Government. Many challenges remain, and we have a lot of work to do, but I am confident that, in time, we can restore the Company's fortunes.

However, investors didn't react too badly to the news and shares jumped over 6% on delivery of the results. This is likely in part due to Soames' aggressive recruitment spree to turn the company around – including the hire of current interim CEO of Aggrego, Angus Cockburn, as CFO.

John O'Brien from analyst house TechMarketView commented on the hire, plus the many others, that although this signals strong leadership, Serco could still face a tough year ahead. He said:

Soames is bringing on board his former running mate at Aggreko, Angus Cockburn, to take on the role of group CFO from October. Soames and Cockburn worked together for 11 years at Aggreko as CEO and CFO, so this should be a strong new top team to take Serco forward.

Soames is wasting no time bringing together senior figures from many of Serco’s competitors, to help rebuild confidence in the business. Earlier this week he appointed former CSC UK GM Liz Benison to run UK & Europe. And last month, Kevin Craven, head of Balfour Beatty Services business, was announced as the new Central Government lead, and David Eveleigh, general counsel at BT Global Services, as the new group general counsel and company secretary.

Serco is sticking with its FY14 guidance for adjusted revenue of at least £4.8bn and adjusted operating profit of £170m+. But this implies a revenue decline of c10% in the second half, and a significant pick-up in profits. Things could get even worse on the revenue front going into 2015 however as win rates were particularly poor in H114, and the pipeline of opportunities has fallen by £4bn in just six months.

Verdict

G4S has done well to turn around its fortunes in such a short amount of time, but the backlash was always going to be a worse hit for Serco, which had been relying upon almost 50% of its revenues to come from the public sector.

That being said the hires at Serco suggest a willingness to bring in the right people to turn it around and rebuild a company that did previously have a strong reputation in the outsourcing market. Whether or not any future success will be in the public sector, that remains to be seen.

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