Peel Hunt upgrades Serco to 'hold' from 'reduce'
Peel Hunt upgraded Serco to ‘hold’ from ‘reduce’ on Wednesday as the current share price is close to its new target price of 100p, up from 87p.
FTSE 250
19,742.36
13:15 25/04/24
FTSE 350
4,449.41
13:15 25/04/24
FTSE All-Share
4,402.95
13:15 25/04/24
Serco Group
181.50p
13:14 25/04/24
Support Services
10,607.16
13:14 25/04/24
Following the outsourcer’s pre-close trading update on 13 December, the brokerage confirmed its 2018-20 forecast adjustments. Its 2018 pre-tax profit estimate is unchanged at £79m, while its earnings per share estimate increases by 6% to 5.2p due to the reduction in the tax rate to 25% from 29%.
Peel’s forecast for 2019 pre-tax profit increases by £2.8m to £81.0m to reflect a £0.8m increase in EBITA, which places its forecast in the middle of the £95-100m guidance range.
The primary driver of the upgrade to EPS forecasts is lower effective tax rates, which reflect the improvement in and mix of profitability. Leverage and net debt are also expected to be lower than previous guidance, Peel said.
Peel noted that the shares trade on 18.0x 2019 EPS estimates as the market attempts to value Serco using an assessment of recovered earnings in the medium term.
"When the UK business returns to sustainable profitability some or all of these tax losses will be recognised and utilised, and the effective rate of tax will be reduced, potentially below the 20% rate we currently assume in the medium term," it said.
At 1000 GMT, the shares were up 1.8% to 100.74p.