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Challenging times for Serco as it issues yet another profit warning

Article By: ,  Financial Analyst
April 29, 2014 5:54 PM

Shares of Serco have been pummelled today (29th April), partly on the back of the company’s latest profit warning.

Serco’s current woes were highlighted here, previously, and it was said at the time that soon-to-be CEO, Rupert Soames, certainly has his work cut out in terms of repositioning Serco for growth as the company continues to feel the lingering ramifications of last year’s scandal.

With that in mind, it’s not entirely surprising that the company continues to face challenges in the short-term.

Serco’s financial situation

In addition to its latest warning, the company is also looking at the possibility of turning to shareholders for help, as it tries to strengthen its balance sheet by issuing new shares.

Indeed, there’s also the matter of Serco’s balance sheet: cash position has been on the decline and debt has been creeping up. As at December last year, Serco had a group net debt of some £746m, up from around £638m the year before.

That works out to a net debt to EBITDA ratio of around 2.3x, which – although is the highest it’s been in recent years – would not have caused much pause for thought in itself.

Except, according to the company’s last annual report, its debt covenants (the agreement between Serco and its lenders) stipulate a net debt to EBITDA ratio of no higher than 3.5x.

Based on Serco’s latest update, the downward trend in the company’s profits look set to continue: lower EBITDA and rising – or even static – net debt means a higher net debt to EBITDA ratio. It goes without saying what all of this could mean for the company.

Little wonder then that Serco is looking to shore up its balance sheet, though details of just how much cash it’s looking to raise are currently unknown  (Serco plans to release another update at some point this week).

Serco’s punished shares

At time of writing, the company’s shares are down around 15%, bringing the total decline over the last year alone to around 45%. All on the back of disappointing news flow.

Of course, there’s every possibility of a near-term rebound, particularly when Mr Soames takes the helm (starts 1st of May) and perhaps subsequently impresses the market with plans for just how he intends to restore the company to growth.

After all, the market cheered in February, on the back of news that Mr Soames was set to take the lead at Serco – the fact that he led a return to growth at power generation player Aggreko provides some optimism.

All that said, it remains a bumpy road ahead for Serco.

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