Credit Suisse downgrades Serco to 'underperform', slashes target price
Credit Suisse has lowered its rating for UK outsourcing group Serco from 'neutral' to 'underperform' and more than halved its target price for the stock, saying that the shares are "too expensive".
Serco Group
177.90p
11:19 19/04/24
The downgrade follows Serco's unscheduled strategic update and profit warning last week, as it proposed a £550m rights issue to strengthen its balance sheet.
The valuation is looking "too stretched given the elevated risk profile", the bank said.
"We move to presenting estimates on an ex-rights basis and, assuming a theoretical ex-rights price of 169p on an eight-for-11 rights issue, we estimate the shares to be trading on 27 times fully diluted 2016 estimated earnings," Credit Suisse said.
The target price for the shares has been cut to just 142p, from 325p previously.
"After the unveiling of significant onerous contract provisions and the risk of more to come, we see huge uncertainty around the operational cash flows of the business," the bank said.
It highlighted that free cash-flow is set to be negative in 2014 and 2015 and predicted that no dividend will be given until 2016.
"Investment in risk management, systems, controls and business development is likely to retard medium-term margin recovery," it added.
The bank has slashed its earnings per share forecasts for 2015 and 2016 by 65% and 72% respectively.
The stock was down 7.3% at 166p by 11:23 on Friday and has now fallen by nearly 50% since the update on 10 November.