Merrill maintains 'neutral' stance on Serco; RBC Capital Markets says 2016 key year

11th Aug 2015 12:17

(ShareCast News) - Bank of America Merrill Lynch has maintained its 'neutral' rating on troubled outsourcing group Serco after the group posted a first-half pre-tax loss of £76.2m. The broker warned that although the group's Compass asylum detention centre operation benefited from lower UK asylum numbers, the ongoing migrant crisis in Calais, where immigrants are trying to enter the UK, "warrant caution" for the second half.Merrill also noted Serco's "slightly fuzzy caveat" that risks associated with full-year guidance are now weighted to the upside."Revenues and profits will continue to be under pressure in 2016 as previously indicated, and the company has now given some more guidance on this," the broker said in a note."We leave our trading profit forecasts broadly unchanged for 2015 (£92.5m), although we trim our revenue forecasts for 2016 earnings by (around) 4% to reflect the increased disclosure on the revenues up for rebid and timing of new contract opportunities. We also take our 2016 trading profit down by (around) 2%."RBC Capital Markets, meanwhile, said 2016 would be the key year for the group."There is slightly more detail on 2016 revenues, where known attrition will reduce revenues by £350m and there are another 60 contracts to be rebid between now and 2017, with aggregate annualised revs of £140m for the remainder of 2014, £340m in 2016, and £360m in 2017," the broker said."Hence there is a significant risk that revenues could be well below consensus of £3,325m for 2016 and 2017. Management will update on 2016 guidance at the full year.""Elsewhere, management is doing the right things with regard to costs (£200m op cost reduction) and implementing the strategy, but there remain lots of moving parts and clearly the recovery is going to take a long time, which we think is largely factored into valuations already."At 1331 BST, Serco shares were down 1.4% at 123.80p.