Serco Group PLC (LON:SRP) shares have been upgraded to ‘neutral’ from ‘sell’ by Citigroup after the outsourcer last week increased its full-year profit forecast.
The company, which operates London’s Docklands Light Railway, on Friday said it now expects its full-year underlying trading profit to come in at between £90mln and £95mln, up from previous guidance of around £80mln. Serco attributed the improvement to cost-cutting measures which enabled it to deliver better than expected savings.
READ: Outsourcer Serco sees forecast beating annual profits
In a note to clients, Citi analysts said Serco’s second half cost savings were £3mln-£5mln better than it had expected, with more to come.
“Another £10mln guided for 2019 looks set to more than offset Atomic Weapons Establishment (AWE) downwards repricing. Our previous Sell rating was based partly on this AWE re-pricing and partly on a wall of forthcoming rebids,” Citi analysts wrote.
Under the terms of the AWE contract, Serco along with Lockheed Martin and Jacobs Engineering Group, manages the development, maintenance and manufacturing of warheads for the UK's strategic nuclear deterrent, as well as performing other roles central to national nuclear security. The contract was recently renegotiated with the UK government.
Serco also expects its full-year results to be boosted by a number of non-recurring trading items, such as end-of-contract settlements and other commercial negotiations. Net debt is expected to be at the lower end of its previously guided £200mln - £250mln range.
Shares in the outsourcer were 5.3% up at 103p in mid-morning trade.