Serco shares hit by Numis downgrade to 'reduce'

6th Aug 2014 11:04

Serco's shares were under pressure on Wednesday after Numis Securities cut its recommendation for the outsourcing group from 'hold' to 'reduce'.The broker said the market was already pricing in a "significant operational turnaround" at the company after new chief executive Rupert Soames started in May."In our opinion, significant risks still exist to short-medium term forecasts (both operationally and from a probable rights issue) and it will take a considerable length of time to stabilise a business that has seen huge staff turnover, and very significant contract attrition, before any sort of recovery can be delivered," Numis said.Serco's contract retention rate has reduced "materially" in the last two to three years, while a spate of loss-making contracts suggests that the quality of earnings has deteriorated, the broker said.Numis has slashed its earnings estimates for the next three years and is now 14-15% below consensus forecasts, though it sees further potential downside to numbers.It has cut its target price for Serco's shares from 360p to 295p.The stock was nearly 6% lower at 333p by 11:15.BC