Serco Plunges as Profit Outlook Hurt by Contract Fraud Probe

Serco Group Plc forecast a decline in profit next year as it grapples with a criminal inquiry into the handling of U.K. government prison contracts, sending the company’s shares to the lowest since August 2009.

Serco forecast full-year operating profit of about 307 million pounds ($492 million), compared with an estimate from analysts, given by the Hook, England-based company, of 325 million pounds. Serco also said it would cut 400 jobs from its 47,000-strong U.K. workforce in an effort to reduce costs.

“In recent months, our relationship with U.K. government has been impacted by the issues arising on certain contracts with the Ministry of Justice,” the company said today in a statement. “Versus the equivalent in previous years, and in part as a consequence of the ongoing issues with our U.K. government customer, there has been a lower level of new contract awards.”

Former Chief Executive Officer Christopher Hyman resigned last month amid an inquiry into claims that Serco overcharged the U.K. government for tagging criminals. Serco generated about 56 percent of its revenue from the U.K. in 2012, according to data compiled by Bloomberg.

Serco shares fell 17 percent, the most since at least March 1991, to 419.10 pence in London. The stock is down 22 percent this year, giving the company a market value of 2.1 billion pounds.

SFO Probe

The U.K. government referred G4S Plc, the world’s biggest security provider, to the Serious Fraud Office in July, saying it overcharged for electronic tagging services. Serco also agreed to an audit of all its government contracts after irregularities were found over payments to it and G4S for tagging prisoners released on license and defendants freed on bail.

The U.K. Ministry of Justice in August gave Serco three months to undertake “corporate renewal,” and threatened to exclude the company from any future government work if the changes are unsatisfactory.

“Awful statement and we expect further weakness,” analysts at Liberum Capital Ltd., including Joe Brent and Ben Bourne, wrote in a note to clients. “Senior departures, including CEO Chris Hyman, are helping to demonstrate ‘corporate renewal’. However, we think it is unlikely that Serco is given a clean bill of health by the end of November.”

Serco also said today that a five-year contract to manage Australia’s immigration detention centers has come under pressure from a policy by incoming Prime Minister Tony Abbott to stop the flow of asylum seekers entering the country by boat.

Australian Immigration

The number of boat arrivals has fallen from about 40 a month during the summer, to “a handful” in October, Serco Head of Investor Relations Stuart Ford said on a conference call. The contract contributed as much as 8 percent of the company’s revenue in the first half.

Serco pledged in August to repay any profit, estimated at 2 million pounds, earned since the seven-year, 285 million-pound U.K. electronic tagging contract was renewed in 2011 and to forego future profit. Electronic monitoring, or tagging, typically involves requiring offenders to wear a bracelet around their ankle to determine their location.

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