UBS downgrades Serco to 'sell' on earnings uncertainty

Sharecast

LONDON (ShareCast) - UBS (Xetra: UB0BL6 - news) has cut its recommendation for Serco from 'neutral' to 'sell', saying that the stock's valuation does not reflect the uncertainty surrounding the outsourcing group's earnings.

The bank has slashed its target price for the stock by 25% from 400p to 300p.

Since Serco's new guidance on April 30th, in which it implied earnings per share (EPS) would be just 18p, 38% below consensus forecasts, the shares have re-rated.

"High-level sensitivity analysis suggests that even if new UBS estimates are 20% conservative, the shares still trade on 15 times 2015 estimated earnings, in line
with the recent average forward price-to-earnings ratio for the outsourcing space," UBS said.

"There is a restructuring story waiting to emerge at Serco, and management change can be a positive catalyst as we have seen previously at the likes of Rentokil or Filtrona, but in the short/medium-term we see the risk/reward as skewed to the downside."

The bank said that the current weak contract win momentum needs to be addressed if earnings growth is to return.

However, it welcomed the appointment of new Chief Executive Rupert Soames, saying he is the "right man with an excellent track record". It also applauded Serco's more cautious approach to market guidance and expectations.

The stock was 1.4% lower at 348.5p by 10:25.

BC

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