Serious Fraud Office Entered Into Deferred Prosecution Agreement (DFA) With Serco Group

In a recent development made by the Serious Fraud Office (as on July 03, 2019), it notified that a Deferred Prosecution Agreement (DPA) with the wholly owned offshoot of the Serco Group Plc – Serco Geografix Limited (SGL), has been given the nod in principle by Justice William Davis. Before the same judge, the Serious Fraud Office will tomorrow (as on July 04, 2019) apply for the terminal nod for the Deferred Prosecution Agreement (DPA).

If the application receives the final approval from the Judge at Southwark Crown Court, then it will lead to a payment of £19.2m by Serco Geografix Limited (SGL) - a wholly own subsidiary of Serco Group and remission of SFO’s costs. The victim in the case – the Ministry of Justice (MOJ), has already paid a compensation of £70m civil settlement from Serco in 2013.

For the entry in DPA with the SFO, the Serco Geografix Limited (SGL) has taken guilty of three (3) fraud offences and two (2) of manipulation in accounting from a scheme to intentionally misguide the Ministry of Justice as to true extent of profit being accounted in between 2010 to 2013.

Lisa Osofsky, the Director of Serious Fraud Office (SFO) stated - “SGL was involved in the concentrated attempt to lie to the Ministry of Justice (MoJ) to gain illicit profit at the expense of the UK taxpayers and will pursue those who are involved in this sort of unethical conduct so that they are held to account."

The DAP hearing is scheduled for tomorrow at 10:00 AM (as on July 04, 2019) at the Southwark Crown Court, and if the DPA gets approval, the SGL would be credited for the compensation paid related to SL’s 2013 settlement agreement with the United Kingdom’s Ministry of Justice (MoJ), which fully counterbalance the payment of £12.8 mn, SGL otherwise would be liable to settle and this payment also reflects disgorgement of Serco’s profits. Also, the DPA term is for three year, in which SGL concede to offer full cooperation with the Serious Fraud Office (SFO) and expeditiously notify any proof or proclamation of any complex or serious misconduct by itself, its parent entities or offshoots or its directors, officers, employees or agent that would meet the SFO criteria for case acceptance and also stimulate effectiveness of its ethics and compliance programme and report it annually.

The DPA would be conducted with Serco Group- the ultimate parent of SGL to assure the SGL’s performance of its obligation under the DPA.

About Serco Group Plc

Serco Plc is a United Kingdom-headquartered professional business support services company and engaged in providing public services to the UK central government. Its geographical operating segments are categorised into the UK, the Americas, Asia Pacific and the Middle East. As per the latest annual report, the group's earned approximately 45.85 per cent of its total revenue from the United Kingdom and Europe, 22.7 per cent came from the Americas, 19.31 per cent from the Asia Pacific and 12.07 per cent realised from the Middle East. Mr Rupert Soames is the Chief Executive Officer of the group since May 01, 2014 and Mr Angus G Cockburn is holding the chair of Chief Financial Officer since October 31-2014. As on May-12-1988, its shares got listed on the main market of the London Stock Exchange for trading. The outstanding market capitalisation of the group stood at £1.78 bn, which ranks it among the mid-cap companies listed on the main market of the LSE. The group is also a constituent of broader indices like FTSE All-Share and FTSE 350.

Institutional Shareholding

Approximately 42.77 per cent of the group’s equity is owned by the institutional investors, with FIL Investment Advisors (UK) Ltd., Marathon Asset Management LLP, Majedie Asset Management Ltd., UBS Asset Management (UK) Ltd. MSD Partners Europe LLP, Orbis Investment Management Ltd., RWC Asset Management LLP, BlackRock Investment Management (UK) Ltd., Jupiter Asset Management Ltd., and The Vanguard Group, Inc. are some of the major institutional investors in the company. (Source: TR)

Financial Performance – FY18

In the financial ended December 31, 2018, the group recorded a revenue of £2,837 mn against the revenue of £2,951 mn in the same period of the previous financial year. However, on account of lower operating expenses, as compared to the previous financial year, the group's reported operating income (including exceptional items) jumped to £80.5mn from £21.1mn reported in the year-ago period. At the net income level, the group recorded a profit of £67.4mn against the loss recorded in the previous financial year. Reported earnings per share for the year stood at 5.99 pence per share against the loss of 0.76pence per share.

The free cash flow of the group for the year under consideration stood at £25mn against the outflow of £7 mn recorded for the financial year ended December 31, 2017. However, Net Debt at the end of the financial year 2018 increased to £188.0 from £141.1 mn recorded at the end of the financial year 2017.

Financial Ratios

The group's EBITDA margin has improved considerably and stood at 4.5 per cent against 2.4 per cent recorded in the FY17, EBITDA margin improved by 210 bps on a YoY basis, but Serco's performance at EBITDA level was considerably below the performance of its peer group as industry median during the same period was stood at 14.1 per cent respectively.

Also, the Debt/Equity ratio of the group has improved considerably against the previous year’s D/E ratio, but still the contribution of debt in the Serco’s balance sheet was marginally above the industry median of 0.57. Debt/Equity ratio of the group for FY18 was at 0.66 vs 1.10 in the FY17. Long-term debt contribution in the capital structure of the Serco has been narrowed to 35.4 per cent in FY18 against 45.1 per cent held in the FY17.

At return on equity front, the group has recorded a stellar performance as RoE for the FY18 was at 20.8 per cent, considerably above the industry median of 10.0 per cent respectively.

Stock Information

Price Chart- 1 Yr.

Daily Price Chart (as on July 03, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close, at 12:06 PM GMT), shares of the Serco Plc were trading at GBX 144.2 and declined by 1.4 points or 0.96 per cent against the previous closing price. In the year-ago period, shares of the Serco Plc have registered a 52w high price of GBX 146.50 and a 52w low price of GBX 83.50, and at the current trading level, its shares were quoting approximately 84 per cent above the 52w low price level. It indicates the stock is in an uptrend and carrying the potential to register another 52w high price level in the near-term.

Price Performance (%)

On a YoY basis, the stock has delivered a price return of approximately 56.7 per cent, on a year-to-date basis, the stock was up by 52.5 per cent and in the past one month, the stock was up by approximately 10 per cent. Its performance at the bourse was substantially above the performance of the broader benchmark indices.

Simple Moving Average (SMA)

From the SMA standpoint, its shares were trading well above the 200-days, 60-days and 30-days SMA priced, which is a bullish technical measure for stock and indicates that scrip is carrying the decent potential of surge from the current trading level as well.

Volume Summary

From the volume standpoint, the 30-day daily average traded volume in the stock stood at approx. 2.5mn against the 90-day daily average volume of 2.3 mn. Today's volume in the stock (before the market close), stood at 276,635 respectively.

Relative Strength Index (RSI)

Daily 14-day RSI of the stock was hovering in a bullish zone and strengthening the further upside movement in the stock from the current level. However, the trend has marginally reversed as the stock has corrected in today's market session. Share's RSI for the 30-days, 14-days and 9-days stood at 63.71, 67.55 and 68.56 respectively. Also, the stock’s 3-days RSI stood at 61.97. The volatility of the stock for 200 Days, 90 Days, 30 Days stood at 30.96, 25.10 and 29.45 respectively.

Bollinger Band®

 At the current trading level, the 20-day SMA of the stock stood at GBX 137.74, upper Bollinger band® was indicating at GBX146.58, and lower Bollinger band® was at GBX 128.9. This indicates, the stock is trading near its upper Bollinger band® and reflects an uptrend in the stock. However, marginal correction in the stock in today's session would not impact the upside potential, as RSI and volume still supporting the upside movement in the near-term.

Therefore, the overall trend in the stock is positive and also, as it was quoting significantly above the 200-day SMA price level, the long-term prospect of the stock also seems to be favourable for the investors. Also, the fundamentals have improved against the previous year performance.

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