Analysts have been forced to make significant earnings downgrades to their forecasts on multi-disciplined FTSE 100 support service provider Serco (SRP) after a very disappointing trading update. The business at the centre of contract scandals alongside G4S (GFS) has flagged lots of exceptional charges that will depress its next set of financial results. The outlook is gloomy after contract delays and a weaker forward order book.


The shares fall 6.1% to 473.2p although it is worth noting that they've already fallen a lot earlier this week thanks to a Sunday Times article that speculated Serco would issue a profit warning.

SERCO GROUP - Comparison Line Chart (Rebased to first)


Liberum Capital slashes this year's earnings per share (EPS) numbers by 9% to 38.3p. The bank then makes a more severe reduction to its 2014 EPS forecasts, lowering them by 24% to 35.9p.


Serco says the contract problems with the Ministry of Justice has contributed towards delays in previously-anticipated contract awards and a lower level of discretionary spending and ad hoc project work with UK central government customers.


Reputational risks have clearly been elevated by the MoJ situation. In its 2014 outlook, Serco says there has been a lower level of new contract awards to drive organic revenue growth. There's also plenty of impact from attrition where numerous contracts like the UK National Physical Laboratory and various US support operations come to an end. The latter builds on recent disruption to its Americas division from the US Federal government shutdown and the 'general ongoing effect of sequestration'.


Liberum slashes its price target from 540p to 430p but maintains a 'hold' rating.


Cantor Fitzgerald moves from 'hold' to 'sell' with a 450p price target. It says today's announcement highlights that Serco's issues with the UK government 'are having a much broader effect than we originally anticipated.'


Read our recent articles looking at the risks facing the outsourcing industry and a focus on Capita (CPI) which hasn't yet been dragged into the public sector contract scandal.


Issue Date: 14 Nov 2013