Out At The Source? Serco Group Investment Guide

Serco Group Investment Guide

Serco Group plc is a large outsourcing company, based in the UK. The business vies for government contracts in a variety of areas, including transport, aviation, weaponry, detention centres, prisons and schools. Listed on the London Stock Exchange since 1988, Serco Group is a member of the FTSE 250 Index. The firm has international operations across Europe, North America and the MENA region – but the bulk of its revenue flows from its operations in Great Britain.

On paper, outsourcing firms – especially sector giants like Serco – can seem attractive to investors. Such businesses contend for and secure lucrative contracts from governments to run, manage and equip public (or, partially public) institutions and bodies; as a result, their incomes are sizeable and protected, and in the case of vital services (e.g. prisons, schools) revenues are effectively guaranteed – even if a project or contract exceeds its budget, governments ultimately fit the bill.

However, firms that occupy the public-private partnership space (such as Serco) are subject to a significant degree of scrutiny, as their revenue is effectively public money. Scandals which might merely hurt a private sector player can destroy an outsourcer outright. While the initial decade of the 21st century was a strong one for Serco, the second has been typified by a cavalcade of public humiliations and controversies that have wrought severe damage on the firm’s reputation – and the firm’s profitability and share price as a result.

In 2013, for instance, Serco was accused of overcharging the Ministry of Justice on a contract. Serco was forced to repay £68.5m to the UK government over the hullabaloo; a subsequent opinion poll found that 63% of the British public wanted Serco to be banned from bidding for public contracts. The firm was forced to issue a profit warning for both 2014 and 2015 (the group eventually crashed to an overall annual operating loss of £1.32bn), its first sales slump in 25 years. Serco executives sought to mollify investor concerns by pointing to their successful retention of key contracts, but shares fell by 30%. Over the course of 2014, the firm shed almost 60% of its overall value. In the years that followed, Serco witnessed its successful contract bids decline significantly.

Such cases highlight the dangers of investing in outsourcing companies. While outsourcing firms may maintain the confidence of governments, and retain contracts, despite public pressure and controversies, such states of affairs can only continue for so long. Before investing in Serco, or any outsourcer, it is vital to assess and scrutinise its current contracts, and keep an eye trained on the firm’s appearances in mainstream news reporting. Perhaps a good rule to follow is to steer clear of – or get ready to sell – holdings that have been thrust into the limelight. Even a small scandal can set off a chain reaction of crises that the share may never recover from – or at least not recover from in the short term.

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Kit Klarenberg is a freelance journalist and communications professional, specialising in finance. Connect with him on LinkedIn, or Twitter.

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