Few chief executives come with a background as colourful, or a following as enthusiastic, as Rupert Soames. His appointment as chief executive of Serco four years ago gave its shares a 10% bump in one day.
Winston Churchill’s grandson arrived at the flagging outsourcing giant in the wake of a scandal of overcharging to tag criminals, and had soon written down £1.5bn and asked shareholders for £550m.
That deeply discounted cash call, priced at 101p a share, would help Serco “walk the path to recovery and repay the confidence and support shown to us by our shareholders and lenders”.
That path has been a lot longer than anyone dared to imagine — Soames included. Three years on from the cash call and Serco’s shares are languishing below the rights issue price at 97p, giving it a market value of just £1.1bn.
It was never meant to take this long. A partial rally in 2016 was soon snuffed out as the woes of a string of peers, from Mitie to Carillion, dragged down the sector.
Soames, 59, and his finance chief, Angus Cockburn, have instilled much-needed financial discipline at the prisons-to-trains outsourcing behemoth — but at a cost. Their refusal to pay over the odds for work has seen Serco lose an ever-growing list of competitions, most recently the £500m military fire and rescue contract that went to Capita.
Paralysis in the UK government is not helping: opportunities are taking longer to emerge, and when they do, they are often at uneconomic prices. It has won deals, increasingly abroad, but nothing to make up for the dearth of big UK contracts. As a result, its bid pipeline had shrunk to £4.4bn at the end of January from £8.4bn a year earlier. Debt is headed north: it was £141.1m in January, and Peel Hunt analysts reckon it could hit £250m this year.
Soames, who has been on a crusade against the government’s persecution of outsourcing firms, is fed up. He is shifting his attention from the UK to America, Asia, the Middle East and Europe.
I wouldn’t be surprised to see decent first-half profit growth this week, and a short-term spike in its shares. Analysts at Jefferies reckon a “token” dividend could even be restored, but not until 2020 — a long time to wait. Soames is making gains, but progress is agonisingly slow.
As he put it in February, the road ahead is still “long, and probably bumpy”. The question is: when will Serco finally reach its destination? And will Soames have the patience to see out the journey? I wouldn’t climb aboard yet. Avoid.
