Thursday 31 October 2013

Serco (SRP) ... not much PECS appeal

Thursday 31st October 2013

I sold short in Serco (SRP, mkt cap £2.8bn) at 556p/shr.

A few months back, Serco got into trouble with the Ministry of Justice (MoJ) for “... recording prisonersas having been delivered ready for court when in fact they were not. This was a principal performance measure for the £40.7m per annum Prisoner Escorting and Custodial Services (PECS) contract. The MoJ are now investigating what may have been fraudulent behaviour.

Unsurprisingly, Serco agreed to a repayment of the profit earned since the contract was renewed in 2011. What is surprising is that this was estimated to be c. £2m. This contract was renewed in March 2011, suggesting that the c. £2m in profit had been drawn over 29 months. This suggests that even using what may have been a fraudulent means of delivery, that the group only achieved a c. 2% margin on the contract. 2%!!! Gawd knows what it would've been in the absence of irregular interference.

Friday last, Serco’s CEO, Mr Christopher Hyman, walked.

Now the American’s are starting to get uneasy. Negative press coverage in the US is on the up. Around 15% of Serco’s sales are attributable to the Americas. Its most recent contract win centres on the high profile Obamacare programme and is worth c. $115m per annum.

  1. The MoJ investigation unlikely to conclude until the end of November,
  2. The police on the scene,
  3. Indications of paltry margins with or without irregularities,
  4. The CEO departed,
  5. And now the Americans getting upset over “schmoozing”. 
I reckon you’d have to be bonkers to be buying Serco right now. Hence I sold short.

And another thing ...

Technically it looks like the share price has hit resistance in the recent down channel. 

Serco share price
Source: Bloomberg
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