Serco Group plc’s (LON:SRP) shares have been given a boost today after Barclays reinstated its ‘overweight’ rating with a target price of 150p on the British outsourcer, citing a return to revenue growth.
Shares rose 5.07% to 116.10p in morning trading.
In February the company, which provides transport, health, justice, defence and security services in public departments, reported an 11% organic decline in 2016 revenue as uncertainty over Brexit caused delays to contract decisions.
Barclays expects revenue in the 2017 financial year will fall 3.5% but expects a possible recovery in 2018 and beyond, driven by a pipeline of contract opportunities.
The company said such opportunities include a contract to run fire and rescue services in Britain and a Middle East rail deal.
“On this basis, we believe a return to 4-5% p.a. revenue growth and c5% margins is plausible longer term, driving material earnings growth over the next five years (c25% EPS CAGR),” Barclays said.
“With strong management, a 'clean' business model and a broad range of non-UK opportunities we think the outlook is much brighter than at any point over the past three years, though much depends on contract success over the next six to nine months.”
Barclays noted Serco’s guidance for profit margins to fall from 2.7% in 2016 to between 2.1-2.3% in 2017, before rising modestly in 2018.
The bank said Serco’s shares have lost 25% of their value over the past three months as the 2018 margin guidance was a “reminder the path to recovery is a long and bumpy one”.