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Serco Falls for Third Day on Government Sales Risk: London Mover

Serco Group Plc, the services provider whose billing practices are being probed by the U.K. Ministry of Justice, dropped for a third day on threats to its government-contract revenue at home and abroad.

The shares fell 0.8 percent to 528.5 pence in London, the lowest price since June 2012. The U.K. government said last week that it gave information about Serco to the Serious Fraud Office in an investigation of possible overcharging by the Hook, England-based company for electronic tagging of criminals. Serco received more than half of its 2012 revenue from the U.K.

“A big chunk of Serco’s revenues are now either under threat from the ongoing investigation by the government or from the Australian government’s efforts to shift its outsourcing offshore,” said Gideon Adler, an analyst at Investec Securities Ltd., who recommends selling the stock. “On top of that you’ve got the U.S. macro uncertainty, which reads across negatively to Serco’s U.S. business, given that it’s leveraged strongly into federal budgets.”

Serco’s five-year contract to manage on-shore detention centers for the Australian Department of Immigration and Citizenship contributed about 8 percent of first-half revenue. A new government has vowed to stem the flow of asylum seekers and move them to facilities abroad. In the U.S., the failure of politicians to agree on a budget led to a partial shutdown of government operations, which started on Oct. 1.

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Serco employs more than 100,000 people and last year made about 17 percent of its revenue from Australia and 14 percent from the U.S. Those countries are Serco’s two biggest markets outside the U.K.

Today’s fall took the stock’s decline to 4.4 percent in three days, giving the company a market value of 2.6 billion pounds ($4.2 billion).

The shares have fallen 11 percent in the past year, and the company was dropped from the FTSE 100 Index of the U.K.’s biggest listed companies last month.

Of 23 analysts who follow Serco and share their findings with Bloomberg, six recommend buying the stock, 13 suggest holding, and four advise selling. The average 12-month price target for the stock is 622.85 pence, based on 20 estimates, implying a potential gain of 18 percent.

Serco completed the sale of its U.K. occupational health business in a transaction with management for a consideration of 3.5 million pounds, the company said in a statement today. The business provides health care to 450,000 of Serco’s client employees in the U.K. private and public sectors.

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