There's yet more bad news for shareholders in Serco (SRP) as the outsourcing group reveals it will take a £17 million hit to earnings after addressing contract issues in its UK clinical health business. The announcement sends its share price down 1.65p to 436.85p.


Hot on the heels of the electronic tagging contract scandal and a review of its entire business with the UK government, Serco continues to test the patience of its investors. As illustrated by the share price chart, more than a third of its market value has been lost since July. We highlighted the ongoing risks in a story last month.


SERCO GROUP - Comparison Line Chart (Actual Values)


Chief executive officer Chris Hyman quit in October in the wake of fraud allegations at the company level. Serco's UK and European CEO Jeremy Stafford then left in November. The group is now subject to a criminal investigation into over-charging the government for tagging offenders, some of whom were found to be dead, back in prison or overseas.


Today's news focused on Serco's clinical health business. It is ending two contracts early. These contracts, together with a third loss-making contract, require onerous contract provisions for estimated losses in future years adding up to a £17 million non-cash exceptional charge.


Serco says that fewer patient referrals have emerged than expected since it took over management of Braintree hospital in 2011. It says there's only limited opportunities to improve the utilisation of the hospital, so it no longer wants the contract.


It is also heading for the exit with a GP out-of-hours service in Cornwall. It has suffered 'operational challenges' including the implementation of an NHS IT system. In Suffolk, Serco is struggling to achieve the desired productivity gains for a community health service contract that runs until October 2015. It will continue to do the work but says it will have to take a £9 million hit to earnings from the loss-making work, covering estimated future losses.


'We welcome Serco’s initiatives to tidy up its portfolio,' says Cantor Fitzgerald analyst Caroline de La Soujeole, 'however, we wonder how much more mess there is to clean up.' She adds: 'Healthcare (i.e. non clinical support services/Business Process Outsourcing) had been highlighted by management in investor presentations as a key area of growth for the company. This was reiterated in today’s statement but, inevitably in our view, progress is likely to be slow given Serco’s very public admission of failure today.'

Issue Date: 13 Dec 2013