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Serco an "inexpensive defensive" says Liberum as it restates its buy advice

Last updated: 18:15 02 Jan 2013 AEDT, First published: 19:15 02 Jan 2013 AEDT

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The support services group Serco (LON:SRP) is described as an “inexpensive defensive” by the City broker Liberum, which has restated its ‘buy’ advice.

However, analyst Joe Brent has trimmed his valuation to 600 pence a share from 650 pence after what he describes as an unimpressive first half performance.

The change in price target also follows a minor tweak to earnings forecasts in the wake of December’s trading update.

The Liberum number cruncher is expecting Serco to post a 2% rise in sales for the full year, which after a 2% fall in the first six months suggests a very strong end to 2012. Profit margins, meanwhile, are expected to edge up to 6.4% from 6.2%.

The group, which has helped outsource key roles from local and national government, is said to be sitting on a £19bn order book and has a £31bn pipeline of work.

News is expected on new prison contracts. “We have reviewed the prospects list, speaking to management, speaking to other managements and trawling the internet,” said Brent in a note to clients.

“Our general view is that Justice is not as strong as we expected, but we expect prison contracts in the first quarter.”

The current share price of 541 pence (up 6 pence) values Serco on an “undemanding” 12 times prospective earnings, underpinning Liberum’s ‘buy’ recommendation.

“Our review of Serco’s end-markets suggests lots of opportunities, and there could be near-term gratification from prisons - an inexpensive defensive,” Brent’s note concluded.


 

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