Finally, some good news from Serco Group (SRP). The City of London Police has now dropped its investigation into the infamous prisoner escort contract, while the outsourcer has renegotiated financial covenants with its lenders, paving the way for a rights issue.
Police officers had been investigating whether the group falsified figures on the delivery of offenders to court on time. A key performance measure of the contract, which was due to end in 2018, had been to ensure prisoners were "designated ready and available for court" ('dract'). The City of London police found no evidence of any corporate-wide conspiracy among senior Serco management or at board level to falsify records to meet the 'dract' contract requirement.
Serco last year agreed to repay all past profit and forgo any future earnings on the prisoner escort contract. Rival outsourcer G4S (GFS) is still under investigation by the Serious Fraud Office for overcharging on the electronic monitoring of offenders, including some who had died.
Serco also announced just before Christmas that it had agreed with its banks and US private placement lenders to amend covenants. This includes the deferral of the next covenant testing date to 31 May 2015, which paves the way for the mooted £550m right issue in the first quarter of 2015.
Broker Peel Hunt believes the shares, trading on 22 times 2016 earnings, fail to adequately reflect "either the likely dilution from the proposed rights issue or the length of time it will take for Serco to deliver a sensible risk-adjusted margin".
