Broker tips: Serco, Berkeley Group, IFG

23rd Dec 2013 13:34

Serco has made positive steps to rebuilding its reputation with the UK government after winning a contract extension with the Minister of Justice (MoJ), according to Panmure Gordon.The service group expanded its contract to build and run an extension to HMP Thameside in south-east London, worth a total of £120m over 22 years, including the £36m it will cost to build the prison.Serco signed the original £415m, 26-year deal in July 2010. The announcement came a day after it was told to pay back £68.5m to the government for overcharging on contracts.The company was suspended from winning new contracts after it charged for electronic tags on criminals not being monitored, still in prison or even dead.Panmure recommended a 'buy' rating and raised its target price to 550p following the news of the contract extension with MoJ. "The company has not quite got a clean bill of health, with the approval of the Corporate Renewal Programme still outstanding but likely to be approved in January," said Pamure analyst Mike Allen. "We have factored in the exceptional costs related to the government fine, and believe the increased balance sheet leverage is not a major concern at this stage."Friday´s announcement of an 'approach' for IFG Group came as little surprise to analysts at N+1 Singer, given that the company has been undervalued for an extended period of time and the sustained positive key performance indicators (KPIs) at James Hay, strong balance sheet and relative recent disposal of its International division. However, since the approach remains highly conditional and at an early stage they opted to lower their recommendation on the stock to 'hold' from 'buy' - with a price target of 150p - following the share price movements in the wake of the announcement. Nevertheless, they believed that any future offer should recognise the scope which exists for "value creation based on the restructuring and cost investment which forms a foundation for significant earnings growth to come in future years."Thus, a valuation multiple, of nine times´ enterprise value to operating earnings [EV/EBITDA] applied to the brokers´calendar year 2015 forecasts, alongside a premium, would yield a valuation of at least 175p, N+1 Singer explained to clients on Monday. A "compelling" valuation would have to come in north of the 190p mark, it added. That would equate to a ten times´ calendar year 2015 EV/EBITDA ratio and represent a 37% premium to the price prior to the announcement."We believe that the business has significant earnings growth potential as a result of the actions taken by management," the broker concluded by saying. Berkeley Group Holdings is a "strong performer" but there are greater value opportunities elsewhere, according to Jefferies International.The broker reiterated a 'hold' rating and raised its price target by 2.5% to 2,459p following the housebuilder's half year results which were in line with guidance. Jefferies said investors would get better value at industry peers such as Barratt Developments, Taylor Wimpey and Bovis."Interestingly with many talking of house price bubbles in London, Berkeley is yet to call the top and is putting its money where its mouth is, having purchased £278m of land during H1 2014, compared to £317m in the whole of FY 2013," the analysts said.While critics argue that the Help to Buy house price limit of £600,000 unfairly helps those who need help the least - especially those in London, which has the highest house prices in the UK - Jefferies believes this is not the case.It noted that 4% of Berkeley Group's sales were assisted by Help to Buy while other housebuilders with a broader geographic spread have reported sales under the scheme at 40% of volumes. "In our view Help to Buy is helping those most in need, rather than being 'misused' by the wealthy."The broker added that since Berkeley is primarily focused in London, any shocks in the city's housing market are likely to impact the price of the shares more than its peers, which have less focus on the capital. AB