Berenberg starts coverage of Mears and Capita

(Sharecast News) - Berenberg initiated coverage of Mears and Capita on Wednesday as it took a look at the UK business services sector. The bank started Mears at 'buy' with a 550p price target.

"Mears is asset light and highly cash generative, combined with a strong net cash position, which is providing capital allocation opportunities for strategic bolt-on M&A and returning surplus cash to shareholders through buybacks," it said. "In the past two years the company has already purchased over circa 30% of today's market cap."

It also started coverage of Capita, with a 'hold' rating and 350p price target. It highlighted the "significant" progress new management has made to resurrect the business and drive the turnaround.

"Importantly, we are now approaching the inflection point towards positive free cash flow, driven by material cost savings," it said. "The investment in the tech platform and AI capabilities provides potential upside risk; however, we initiate at hold and await de-risking of the FCF inflection and AI investment to come to fruition before becoming more constructive."

Berenberg also said that given the recent strong share price performance, it thinks the risk/reward at 8.2x FY1 price-to-earnings is balanced at this juncture.

The bank lifted its price target on 'buy' rated Mitie - its "top pick" in the sector - to 210p from 185p.

"We are excited by the company's growth potential driven by the recent c£350m Marlowe acquisition and potential catalysts from awards from its record c£31bn pipeline," it said.

It also hiked its price target on 'buy' rated Serco to 300p from 270p, saying it sees upside from further growth in its defence division and North American business that has grown to over circa $2bn, potentially driving further margin progression.