Jefferies downgrades Serco to 'hold' on lack of growth potential

(Sharecast News) - Serco's share price was under pressure on Friday after analysts at Jefferies lowered their rating for the public sector-focused outsourcing group from 'buy' to 'hold', citing headwinds to earnings momentum. The broker downgraded the stock and slashed its target price for the shares from 225p to 175p, indicating just 13% upside from Thursday's closing price of 155.1p.

"While we continue to like the underlying end market positioning at Serco and see value in the US defence business, nearer-term earnings and FCF momentum looks more muted, with headwinds in Serco's largest contracts unhelpful," Jefferies said.

"As a result, despite attractive valuation, any further re-rating may take time."

According to Jefferies' estimates, Serco is expected to see no profit growth over 2024 to 2026. This is partly a result of the recently announced loss of a £165m Australian immigration detention centres contract, predicted reductions in UK immigration, lower estimated contract revenues with Centers for Medicare and Medicaid Services in the US.

Then there's the additional headwind from higher national insurance payments in the UK following changes in the autumn budget, which the company said will increase labour costs by £20m a year.

Upside risks for the stock include potential further share repurchases, and an estimated £500m in surplus capital which could be used for M&A over the next 12 months, the broker said.

The stock was down 2.3% at 147.9p by 0906 GMT.