Worst may not be over for Serco shareholders, says Cantor Fitzgerald

1st May 2014 09:55

Cantor Fitzgerald has said that the scale of the profit warning by outsourcing group Serco is 'surprising', as it reiterated its 'sell' recommendation for the stock.Serco announced late on Wednesday that it plans to raise £170m from an emergency placing to strengthen its balance sheet.Year-to-date performance has been weaker than expected, with the company forced to warn on full year profits on Monday. It now said that adjusted operating profit in 2014 would be less than £170m, down from guidance for £220-250m just seven weeks ago.Adjusted earnings per share are expected to be "no less than" 19p at constant currencies with adverse foreign exchange movements having a further 1p negative impact, around a 37% downgrade compared to previous guidance of 28p-33p at constant exchange rates.Cantor said that the company's new guidance suggests a fair value of around 220p for the stock, based on the broker's previous valuation methodology of applying a target price-to-earnings (PE) multiple of 12 to current-year estimated earnings. This is equivalent to a 25% discount to the historic average PE multiple of 16, which Cantor believes is "justified given the company's ongoing woes"."Whilst we prefer to value businesses on their earnings prospects two years ahead, at this stage any fiscal year 2015 earnings estimates would be highly notional we believe. Serco has had a spectacular fall from grace, in our view, but we are not convinced that the worst is over for shareholders."The new Chief Executive Officer has barely got his feet under his desk and, as we expected, Andrew Jenner, group Chief Financial Officer is stepping down. It is therefore a real possibility in our view that we will see more 'kitchen sinking' by the new management team."The broker placed its target price under review following Monday's update.The stock was 3.3% lower at 328.8p by 10:09 on Thursday and stood nearly 20% lower than where it was the week before following a sell-off earlier in the week.BC