Broker snap: Serco delivers pleasant surprise

26th Aug 2009 11:35

Support services group Serco surprised the market with better than expected results on Wednesday morning, prompting Charles Stanley to reiterate its recommendation to stock up on the shares.'The announcement should be well received for a number of reasons. Firstly, the group has surprised with a much stronger free cash flow [FCF] number than expected (FCF was +54%). Secondly, the earnings quality has improved with no 'one-off' items. Thirdly, Serco has delivered good EPS [earnings per share] growth (+37.7%) and the outlook statement is very positive,' the broker said.Charles Stanley notes that the shares have underperformed over the last six months as investors have focused on recovery plays, but reckons the shares are about to enjoy their spell in the sun. The broker foresees appetite for risk declining over the coming months as the rate of economic recovery fails to keep pace with rebounding equity markets. Under such a scenario, the market should turn to defensive stocks such as Serco, Charles Stanley believes.'Furthermore, the share rating is low relative to its historic multiples and looks good value in comparison to its peer group,' the broker added. Charles Stanley has increased its price target from 460p to 480p and reitered its 'accumulate' recommendation.