Credit Suisse upgrades Serco but uncertainties still "abundant"
The share price of Serco was given a boost on Friday after analysts at Credit Suisse lifted their recommendation for the outsourcing group from ‘underperform’ to ‘neutral’.
FTSE 250
20,749.90
16:49 17/05/24
FTSE 350
4,631.57
16:49 17/05/24
FTSE All-Share
4,584.23
17:09 17/05/24
Serco Group
182.60p
16:54 17/05/24
Support Services
11,524.70
16:49 17/05/24
The bank, which hiked its target price for the shares from 142p to 208p, said that upgrade “reflect[s] strong reported progress in the disposal process for non-core private sector business process outsourcing (BPO) assets”.
Credit Suisse had interpreted Serco’s proposed rights issue of up to £550m as being indicative of a lack of confidence in the company’s ability to raise substantial proceeds from the disposals, and it thought that sales were unlikely before the publication of its 2014 results in March.
However, the renewed optimism now means that Serco could agree terms on the sale of one or more of its larger non-core business units before then.
As such, the bank has lifted its earnings per share estimates for 2015 and 2016 by 24% and 20% respectively “to reflect a significant drop in assumed dilution” from the rights issue.
Despite the more positive stance on the stock, Credit Suisse said that “uncertainties remain abundant” with the company still to announce the conclusion of its strategic review.
The bank raised concerns about the terms of equity dilution levels, residual costs and liabilities post disposals, management’s ability to lower the in-contract cost base and the need for heavy reinvestment in the business.
Serco’s shares trade on a theoretical ex-rights price-to-earnings ratio of 24.8 on 2016 estimates and 15.2 on 2017 estimates “which still looks relatively expensive given the risks”, Credit Suisse.
The stock was up 7.7% at 215.9p by 10:58.