Broker snap: Credit Suisse downgrades Serco to 'neutral'

19th Nov 2012 09:33

Credit Suisse has lowered its recommendation for outsourcing group Serco from 'outperform' to 'neutral', highlighting limited upside for the stock.Following last week's third-quarter trading update, Credit Suisse has reduced its 2012-14 earnings per share estimates by 2-6%. As such, the target price for the shares comes down from 650p to 610p "representing limited potential upside on a 12-month view".The broker said that it has been prompted to reduce its rating "given lower near-term visibility, a temporary moderation in Serco's organic recovery and a 28% price-to-earnings ratio re-rating (on 2013 estimates) in the year to date."While Credit Suisse says that Serco is well-placed to benefit from strong growth opportunities in the long term, the broker forecasts a pause in growth momentum as a result of "further deepening of uncertainty around new and rebid contracts in the US, delays to the next leg of UK prison outsourcing and not making the shortlist for some large upcoming deals (eg LB Barnet, NS&I, Dept. of Transport BPO)."The stock is now trading at 12.5 times 2013 earnings, a 32% premium to the market.Shares were down 1.82% at 540p in mid-morning trade on Monday.BC