Serco warns taking on Carillion contracts will hit profits this year

The outsourcing firm expects first-half revenue to fall by around 6 per cent: Reuters

Outsourcing group Serco expects to report a drop in revenues for the first half of this year, and said taking on contracts from collapsed rival Carillion would hit profits.

The company has forecast revenue of £1.35bn for the first half, down from £1.51bn in the same period last year.

According to Serco, this reduction is due in part to the impact of foreign exchange rates, which accounted for £60m of the lost revenue.

The group also said profits are set to rise to between £35m and £40m, from £34m last year, driven by “transformation savings”.

The firm said it has been working closely with Carillion’s liquidators to agree acquisition terms for various health contracts after the collapse of the contractor earlier this year.

Serco now anticipates that it will take on the contracts for facilities management services at six major NHS hospital sites: Great Western Hospital in Swindon; Darent Valley Hospital in Dartford; James Cook University Hospital in Middlesbrough; Harplands Hospital in Stoke-on-Trent; The Langlands Unit of Queen Elizabeth University Hospital in Glasgow; and Addenbrooke’s Treatment Centre in Cambridge.

A contract for Great Western Hospital in Swindon has already been transferred, while the others are expected to do so over the coming weeks.

Serco said the transfer of the Carillion contracts will likely result in a “small negative impact” on the company’s net profitability for the 2018 financial year.

Rupert Soames, Serco group chief executive, said: “Notwithstanding market conditions that are less than ideal, particularly in the UK, we are responding appropriately and continuing to make progress in line with our strategy.”

Shares in Serco were down more than 4 per cent in Friday morning trading.

AJ Bell investment director Russ Mould said Serco’s announcement of a potential £6m profit growth on Friday was “never likely to impress the market”, particularly because it “was achieved thanks to heavy cost cutting instead of any improvement in trading”.

“Revenue actually fell materially amid market conditions, which in the company’s estimation is ‘less than ideal’,” he added.

“Investors have very limited visibility on the future performance of the business as Serco admits its profitability is highly sensitive to even modest movements in revenue and costs.

“There is no mention of any recovery in the pipeline of potential new work. At the year end, the pipeline had nearly halved to £4.4bn and this is still to be replaced by new opportunities.”