Today’s Falling Knife: Serco Group plc Slumps As Police Called In

The shares of Serco (LSE: SRP) slumped 59p, or 10%, to 548p during early trade this morning after the outsourcing group admitted it had called in the police following the misreporting of data on a prisoner escort contract.

The FTSE 100 member said it would repay the £2m profit earned from the contract to date back to the Ministry of Justice, and forgo any future profits from the deal.

The escort contract was awarded in 2011 and was valued at £285m over seven years.

Serco’s contract update accompanied first-half results that showed underlying revenues up 11% to £2.1bn and adjusted pre-tax profits up 11% to £127m.

Serco noted its performance was bolstered by last year’s “record level of contract wins” and contracts worth £2.1bn signed so far this year.

Recent deals include operating the Docklands Light Railway for £100m, managing roads in Hong Kong for £80m and providing health services in Abu Dhabi for £5m.

The dividend was lifted 17% to 3.1p per share.

Christopher Hyman, Serco’s chief executive, said:

The strong financial performance over the first six months of 2013 has met expectations, our overall guidance for the full year is unchanged and the outlook remains positive. 

Mr Hyman added Serco’s order book current stands at £18.5bn and that 98% of budgeted revenues had already been secured by contracts for 2013 as a whole.

Prior to today, City experts were predicting current-year earnings per share of 43p and a 2013 dividend of 11.5p per share. Those projections place Serco on a potential P/E of 12.8 and yield of 2.1%

Of course, whether the contract trouble with the Ministry of Justice, today’s results and the wider outlook for the outsourcing industry all currently combine to make Serco a ‘buy’ is something only you can decide.

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> Maynard does not own any share mentioned in this article.