Broker snap: UBS downgrades Serco to 'neutral'

8th Aug 2012 12:42

UBS has downgraded its rating for Serco from 'buy' to 'neutral' following a strong run in the shares of the international outsourcing group.The broker said that it remains upbeat about the UK/Europe and Global Services businesses but uncertainty in the US is likely to remain in the short term."Serco's UK business has shown good contract win momentum in the last six-nine months and we remain optimistic on further conversion of the pipeline. Private sector success (Aegon, Shop Direct) partially validates recent BPO expansion and seems to be a growth market. "Contract attrition/phasing means negative organic growth in 1H12 and large renewals (tagging, Northern Rail, DLR) are due on a three- to 18-month view, but we see UK/Europe and Global Services fundamentally as good growth markets."In the Americas, Serco said that the region saw continued double-digit revenue growth declines in the first half as political and fiscal pressures remain. "Comps ease in 2H12, but market data and peers do not yet suggest an underlying turnaround," UBS said.As for the group as a whole, the broker reckons that a 2% fall in organic revenues in the first half will turn to 5% growth in the second."We believe contracts already won give a good degree of visibility into this improvement, especially outside the US. Yet this inflection point remains some six-12 months behind UK outsourcing peers like Capita, Babcock and MITIE."With the share price up 25% in 2012 so far, the broker downgrades but the 600p target price is maintained.BC