Serco Group PLC (LON:SRP) is emerging from restructuring as a “unique asset that is wholly exposed to government contracts with an international reach”, according to analysts at Berenberg, who on Monday initiated the stock with a ‘buy’ rating and 195p target price.
The broker said the outsourcing firm’s margins are “due a material inflection in the coming years towards the industry average” and that benefits from £200mln of coronavirus-related work combined with the mobilisation of some large contracts “should yield an estimated organic revenue growth of 10% in [the 2020 financial year]”.
READ: Serco reinstates full year guidance following strong first half performance
“The UK & Europe division will provide most of the uplift to margins as onerous contract provisions (OCPs), which have plagued the region since 2014, roll off”, Berenberg added.
Analysts also said global increases in defence spending “in line with deteriorating geopolitics”, should provide the company with “attractive avenues for growth”, and that the benefits of government outsourcing “should provide Serco with steady through-the-cycle returns and mitigate risks faced by B2B companies which are more prevalent in the current environment”.
Serco’s shares rose 2.2% to 159.4p in late-morning trading.