Broker snap: UBS upgrades Capita, downgrades Serco

10th Jan 2014 09:51

Outsourcing group Capita was performing well on Friday morning after UBS raised its recommendation for the stock, while sector peer Serco was hit by a ratings downgrade by the same Swiss bank.UBS said that Capita has good earnings prospects with strong results in 2013 underpinning estimates this year, as it lifted its stance from 'neutral' to 'buy'. The target price for the shares was hiked from 1,000p to 1,200p."While some sector peers saw tough trading in 2013 as a result of issues with the UK government, Capita was not impacted and had secured £2.9bn of major contracts when it reported its November IMS, down on the record £4bn in 2012, but well above the £1-2bn long-term average," the bank explained.Capita is predicted to grow by 6-8% organically in 2014 with contract momentum expected to continue in the near term."Our upgrade is partly a switch from 'value' to 'quality' in the outsourcing sector as we simultaneously downgrade Serco to 'neutral' [from 'buy'] following its share-price recovery," UBS said.The bank believes that Serco will likely "pass the test" in terms of the government's acceptance of its so-called Corporate Renewal Programme - "a necessary requirement for Serco to be awarded new work with the government".However, UBS said that the risk-reward balance for Serco is now "more balanced" after its recent run. The 505p target price for the stock has been retained.Capita was trading 2.05% higher at 1,043p by 10:24, while Serco was down 0.80% at 499p.BC