G4S PLC (LON:GFS) shares fell while fellow UK security services company Serco Group PLC (LON:SRP) gained after UBS analysts weighed in on the two stocks in separate notes.
UBS downgraded its rating on G4S to ‘neutral’ from ‘buy’ and cut its target price to 300p from 355p, saying it expects higher restructuring charges and a slowdown in second half organic growth.
The bank reduced its fiscal year 2017 organic growth estimate to 4.2% from a previous forecast of 5%, reflecting a slowdown in the second half due to fading hardware growth and tough comparatives in North America.
In its first half results, published earlier this month, G4S said its ongoing restructuring programme is on track to deliver savings of between £90mln and £100mln by 2020. It reported a 6.2% increase in revenue to £3.7bn and a 5.9% rise in underlying profits (PBITA) to £235mln, driven by a strong performance in North America.
READ: Rise in half-year profits and revenues not enough for G4S as investors worry over emerging markets growth
UBS said the next phase of the company’s restructuring could be “a return to ascendency” but it expects a “ small pause for breath” before its transition as growth decelerates in in the second half.
“Against this backdrop, following a 20% re-rating we see little scope for further multiple expansion in the near term.”
Shares in G4S dropped 1.80% to 284.10p in morning trading.
UBS upgrades Serco to 'buy'
As for Serco, UBS upgraded the stock to ‘buy’ from ‘neutral’ and lifted its target price to 145p from 125p, saying it sees a momentum in 2018 earnings as the company shifts into sustainable organic growth and margin improvement.
“After underperforming by about 80% since 2012, we see the next 12 months to bring evidence of structural growth in outsourcing, improved sales effectiveness, and better pricing of contract risk,” the bank said.
Serco’s restructuring is now largely been completed and its balance sheet is de-risked, UBS highlighted.
UBS increased its forecasts for fiscal years 2017 to 2019 by 6% to 19%.
In early August, Serco reported a decline in first half underlying profit by 30% to £35.3mln and a slight dip in revenue to £1.51bn from £1.52bn, largely due to tough comparatives in the year-ago period. But UBS said earnings should be “less volatile and higher quality in future”.
Serco’s order intake rose to £2.4bn in the first half from £0.9bn the prior year, including £1.5bn for Grafton prison in Australia – its largest ever contract.
READ: Serco shares rise as outsourcer sees first half order intake jump, repeats full-year guidance
“The sales pipeline has already inflected, but the next six months will be busy with contract awards that could drive 0-15% organic growth,” UBS said.
Shares in Serco rose 7.55% to 116.80p.