Broker snap: Jefferies still positive on Serco despite profit warning

15th Nov 2013 10:51

Jefferies has lowered its price target for government services group Serco after the firm's profit warning this week, but maintained its 'buy' rating saying that the subsequent share-price drop was an 'overreaction'.Serco said on Thursday that it had experienced some delays in previously anticipated contract awards, together with a lower level of discretionary spending and ad hoc project work with UK Central Government customers. The Americas division was also affected by the government shutdown in October, as well as the ongoing effects of sequestration.As such, it said that margins this year would be lower than 2012 and said that adjusted operating profit would be flat at £307m, compared with the current consensus estimate of £325m.The share price was down by 16.85% by the close of trade on Thursday to a 52-week low of 419.1p - a drop which Jefferies believes was overdone."Some investors threw in the towel yesterday and we think Serco's share price has overreacted to risks, particularly as there are signs of a warmer relationship between government and outsourcers."The broker said that UK government reports will be key to the firm's revenue outlook and "rehabilitation in the eyes of investors"."We continue to believe reports will call for a series of actions that Serco has already implemented and the group will soon be permitted to continue bidding for public sector contracts."The broker cut its target price from 675p to 560p but maintained its overall positive stance on the stock.The share price rebounded slightly on Friday morning, trading just 2.13% higher at 428.03p.BC