Week ahead: Recovery plans of troubled outsourcing firms Serco and G4S in results spotlight
PUBLISHED: 06:00 11 August 2014
The recovery plans of troubled outsourcing firms Serco and G4S will be put to the test this week when the pair announce half-year results.
Retiring baby boomers in the United States and the growing Asian middle class will boost Prudential’s half-year profits on Tuesday, despite the strong pound.
The group, led by chief executive Tidjane Thiam, will post operating profits up 6% to £1.5 billion on the back of robust foreign earnings.
Brokers at Barclays call this growth “respectable” because they estimate currency translations from across Asia and America will have knocked 9% from earnings at the group, which has 23 million customers worldwide.
The City is relaxed about the effect the surprise Budget reforms by the Chancellor will have on the Pru after George Osborne said retiring savers will no longer need to buy annuities which pay an annual income until death.
Legal & General said its shrinking individual annuity business was more than offset by growing bulk company annuities unaffected by the changes.
It added that many pensioners will not have saved sufficiently to fund their retirement and that it was looking into launching new mortgage products to release cash from their homes.
The proposed changes do not come into force until April and many in the City say this will give the Prudential enough time to adapt to the new market.
Brokers at Panmure Gordon said the fundamental changes to the annuity market “will throw up both opportunities and potential threats to the Pru.”
Rupert Soames will highlight the scale of the challenge facing him as Serco boss when the outsourcing firm unveils half-year results on Tuesday.
The former Aggreko chief executive joined the firm after a scandal-hit 2013 in which it was forced to refund the Government £68.5 million for overcharging on criminal tagging contracts, as well as repay £2 million of past profits from a prisoner escorting contract.
The impact of contract losses and disruption over the last 12 months means brokers at Liberum expect the company to post a “very weak” pre-tax profit of £33.8 million, a fall of 73% on a year earlier.
The company, which employs 100,000 staff, is now clear to resume bidding for public sector contracts but has admitted that trading conditions have become increasingly challenging.
The City expects Serco to take a number of hits, including up to £40 million of contract charges and restructuring costs.
Mr Soames, who took the helm in May, is hopeful that the second half of the year will be better as Serco wins new business and cost reductions begin to take hold.
But Serco, which provides services as diverse as the running of prisons and support for the armed forces, recently suffered a major blow when it lost the Docklands Light Rail franchise it has operated since 1997.
Serco’s rival G4S will be in the spotlight for the same reasons a day later when it presents its half-year results on Wednesday.
Under chief executive Ashley Almanza, it paid the Government over £100 million to settle its own dispute of overcharging of taxpayers for the electronic tagging of offenders, which contributed to a £170 million annual pre-tax loss in March.
This came after G4S failed to provide all of its contracted guards at the London Olympics two years ago, costing it £88 million.
Mr Almanza took over from former G4S boss Nick Buckles in June 2013 following its Olympics failure and as the tagging scandal broke.
Analysts expect the group to post half-year sales down 11% to £3.2 billion with underlying pre-tax profits up almost three times to £177 million, after large writedowns the year before.
In May the firm, which employs some 620,000 staff worldwide, reported £440 million of new contract wins in emerging markets in the Middle East and Brazil, far away from its troubled UK operations.
Bookmaker Ladbrokes will be under pressure to show it has had a good and profitable World Cup when it reports its half-year results on Tuesday.
Chief executive Richard Glynn is running hard to boost online services to take advantage of major events and catch up with competitors such as William Hill.
The firm warned in April these moves will hit its half-year results and the City expects the bookies’ six month pre-tax profit to slump 35% to £55.7 million.
It is racing to finish product upgrades, which allow punters to bet on sport and play casino games from one account. The firm said these upgrades will deliver “tangible benefits” from the World Cup in Brazil onwards.
Deutsche Bank analyst Richard Carter estimates World Cup betting will add £8 million to half-year sales, but forecasts that digital betting and retail revenues will fall, as the firm also closes around 50 shops of its 2,300-strong estate.
By contrast William Hill last week said World Cup betting lifted 80% compared to the 2010 tournament in South Africa. It added that online wagers on the tournament tripled compared with four years ago, with 60% of bets made via mobile devices.
The industry is facing pressure over controls on betting shops and fixed-odds gaming machines, dubbed the “crack cocaine of gambling”. Shares across the sector slipped earlier this year as bookmakers were hit with a surprise hike in gaming machine duty in the Budget.
Construction business Balfour Beatty will be quizzed on its strategy on Wednesday after the collapse of £3.4 billion merger talks with rival Carillion.
The tie-up, which would have created a new FTSE 100 group, fell apart last week as Balfour blamed Carillion for the “wholly unexpected decision” to insist that the sale of its US arm Parsons Brinckerhoff be included in the deal.
Balfour said the sale of its US business, which it bought for £380 million in 2009, was already well advanced and walked away from the talks.
This leaves Balfour struggling under a series of profits warnings, after delays and contract disputes at its Cheadle-based engineering services business. This led to the departure of chief executive Andrew McNaughton in May.
Shares in the company, which built the aquatics centre at the London Olympics, have slid 18% so far this year.
Analysts at Numis estimate Balfour’s “underlying weak trading” will see it post pre-tax profits down 38% to £28 million from a year ago.
The broker said the rationale of a tie-up between Balfour and Carillion was strong because the merger of joint operations in the UK and the Middle East would create savings of around £178 million.
Numis said that other rivals will take a close look at bidding for Balfour even if Carillion does not attempt to revive the deal as Balfour was now ‘in play’.
Balfour Beatty was founded in London by George Balfour and Andrew Beatty in 1909.