Why Shares In Serco Group plc Plummeted

Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

What: Shares in Serco (LSE: SRP) fell 20% to 320p during early trade this morning after the outsourcing group suggested a rights issue to strengthen its financial position. Serco has had a crisis strewn year, and the announcement made last night amounts to a third profit warning in the last 12 months. Serco commented:

“It has now become evident in the light of recent performance that we may need to reassess the level of risk implicit in the assumptions underlying our forecasts.  This may in turn require a material downward revision to expectations, and for us to review the appropriateness of our financing position.”

So what: Profits in Serco fell 62% in 2013 after agreeing a £91m settlement for mischarging the government on a criminal tagging contract. Profits were expected to fall 20% below expectations this year, but after a “challenging” performance in the early going, investors will be braced for worse. Serco’s shares have nearly halved in value since last April, and the incoming chief executive, Rupert Soames, has bigger problems to deal with than he initially might have expected.

Now what: Serco has already laid off 400 staff at a cost of £14m and has warned there is potential for more job losses. The firm is still being investigated by the Serious Fraud Office, although a ban on competing for new government contracts was lifted in January.

Despite this, Serco’s 11p dividend was well covered in 2013, supported 3.5 times by earnings. The dividend has been lifted in each of the last five years — gaining 68% in that time.

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Mark does not own shares in Serco.