FTSE 250 outsourcer Serco Group PLC (LON:SRP) has been upgraded to ‘Hold’ from ‘Reduce’ by analysts at Peel Hunt as the broker upgraded its earnings per share (EPS) forecasts on the back of a lower effective tax rate.
In a note to clients, the broker forecast EPS for the full year at 5.2p, with the primary driver being a lower effective tax rate which fell to 25% from 29% reflecting an “improvement in and mix of profitability”.
READ: Serco shares jump as it maintains upgraded 2018 guidance after strong order intake
Peel Hunt also upped its target price to 100p from 87p, adding that it had also increased its 2019 EPS estimates to 5.4p from 4.9p based on a reduction in the tax rate to 23.5% from 28%.
“Following the Pre-close Trading Update on 13 December, we confirm our 2018-20 forecast adjustments. The primary driver of the upgrade to EPS forecasts is lower effective tax rates, which reflect the improvement in and mix of profitability. Leverage and net debt are also expected to be lower than previous guidance. With the current price close to our 100p revised target price, we upgrade our recommendation from Reduce to Hold”.
Earlier this month, Serco issued a trading update which maintained its guidance for 2018 underlying trading profit as margins grew on the back of an improved operational performance and cost cuts as part of its restructuring.
At the time, the firm said it expected underlying trading profit to rise 30%-40% to £90mln-£95mln, in line with the upwardly revised estimates provided in September, thanks to one-off items such as end-of-contract settlements and other commercial negotiations.
In mid-morning trading Wednesday, Serco shares were up 1.9% at 100.9p, just above Peel Hunt’s new target price.