Serco Group PLC (LON:SRP) has been upgraded to ‘Sector Perform’ from ‘Underperform’ by analysts at RBC as they saw short-term risks reduce and an “achievable” set of 2019 forecasts.
In a note, the Canadian bank said with the 2019 forecasts the risk of “short-term disappointment” was low, adding that it expected an in-line update from the FTSE 250 outsourcer on Thursday.
READ: Serco shares soar after Citi upgrades on forecast-beating profit expectations
“The risks to 2019 [earnings per share are] relatively low given the visibility, cost-saving underpin and swing on Carillion contracts. This should more than compensate for the one-off positive factors from 2018 falling away”.
However, analysts said the 2020 fiscal year was “tougher to call” given the contract rebids which included the loss-making COMPASS contract, Dubai Metro, a US Navy installation contract and NorthLink ferries, although Serco’s rebid rate was currently “well over 90%”.
The bank added that it expected the company’s UK market to “remain tough” due to Brexit uncertainty, although “recent commentary from the government regarding the need to balance risk and reward, and around too much focus on cost rather than the quality of service historically, has been mildly encouraging”.
RBC also said a new intended framework for private prison operators, which “should lead to shorter lead times and less complex bidding wars” was also positive for the firm.
The bank retained its 90p target price on the firm, adding that the emergence of free cash flow as onerous contract costs fell away in 2019 and 2020 would “provide scope for M&A and a potential resumption of the dividend”.
In mid-morning trading Monday, Serco shares were steady around 85p.