Broker snap: Serco rated 'sell' as Investec sees better value elsewhere

29th Aug 2013 11:21

Investec admits that Serco reported a decent set of interim results on Thursday, but chose to stay on the cautious side and maintained its 'sell' recommendation ahead of a tough second half for the outsourcing company.Shares in the FTSE 100 firm were down a whopping 13.35% at 525.55p by mid-morning in London after the company confirmed that the London police are investigating a "misreporting of data" in connection with its prisoner escort and custody services contract with the UK Ministry of Justice (MoJ). Serco has agreed to repay any profit earnings since the contract was renewed in 2011 (estimated at £2m) and will forgo any future profits on the seven-year work.As for the company's first-half results, organic revenue growth of 8.8% came in ahead of Investec's forecasts, mainly due to a better-than-expected rate of organic decline in the US of 3% (the broker had estimated a fall of 5%). However, while revenue momentum in the first half was helped by a record year of contract wins last year, Serco has not altered its full-year guidance which Investec thinks implies a "material climb down in organic growth into the H2". It said that this is consistent with a deceleration in contract wins in the first half.Analyst Gideon Adler said: "We continue to view Serco as a business well diversified into structural growth, but believe that in the short term it faces the triple threat of a subdued revenue outlook (particularly in its UK public sector pipeline), margin headwinds and contracting free cash flow. "With a subdued second half in prospect we remain cautious and see better value elsewhere."A 550p target price for the stock was retained.BC