Broker snap: Investec cautious about second half at Serco

28th Jun 2013 10:16

Investec has maintained its 'sell' rating and 550p target price for outsourcing group Serco in spite of a well-received trading update on Friday, saying that it is concerned about trading going into the second half.The company announced a broadly in-line second-quarter update, with top-line outperformance offset by a "small reduction" in operating margins due to an increased level of investment behind contract bidding and new market development activity. This resulted into the full-year guidance being unchanged.Investec pointed out that while organic revenue growth was strong, it was driven mainly by record levels of contract wins the year before, and the low level of awards in the first quarter will present headwinds for the firm in the second half.The broker also raised concerns with short-term cash generation given the ongoing spend for bidding and "incremental working capital investment" supporting Business Process Outsourcing (BPO)."With no inorganic support from acquisitions, and a reduced level of contract wins in 2013 so far, we are cautious into the second half," said analyst Gideon Adler."At c14x FY13E price-to-earnings, Serco trades at a discount to the outsourcing sub-sector, but just north of 4.0% headline forecast organic growth is underwhelming sector relative, and with margins and cash under pressure, and further exposure to rebid risk on the horizon, we remain cautious."Nevertheless, the market was generally pleased with the trading update on Friday, with shares up 4.08% at 625p by 10:27.