Broker snap: Panmure expects 'clean bill of health' for Serco in 2014

3rd Jan 2014 11:01

Panmure Gordon has chosen Serco as a key pick for 2014, saying that it expects the outsourcing company to be given a clean bill of health following a tough year.Analyst Mike Allen said he believes there is scope for Serco to recover some of its "dramatic underperformance from last year" as its relationship with the UK government starts to improve again."While the recent settlement with the government is a step in the right direction removing some short term uncertainty, the acceptance of Serco's Corporate Renewal programme is still required for the company to be awarded new work with the government," he said. A decision on this is expected in January and Serco's management seem confident it will be granted. As such, Allen believes that the company will recover and rebuild its reputation with the government as its key supplier during the year.The stock trades at a price-to-earnings valuation discount of 22% to others in the sector on 2013 forecasts and a 9% discount on 2014 forecasts. Allen said that the discount to Babcock and Capita is understandable given its recent issues and lower growth prospects, but the ongoing discount to security solutions firm G4S is "anomalous".The analyst has raised his target price for the stock from 535p to 560p."We think 2014E will be the earnings trough year, and there is scope for the company to rebuild its earnings and reputation during the course of the year. With 18% upside and a dividend yield of 3% on offer, we maintain a 'buy' recommendation on the shares and believe recent strength has been justified," Allen said.The stock was up 0.72% at 502p by 11:16 on Friday.BC