HSBC upgrades Serco to hold despite weak growth outlook

Despite a weak growth outlook, HSBC has upgraded Serco Group from ‘reduce’ to ‘hold’, keeping its target price of 77p.

In a note on Tuesday, the investment bank noted that UK public sector outsourcing was still “lacklustre” and that any new contract wins won’t contribute much to the year’s results.

On top of that, the company’s pipeline has more than halved in the last few years.

“Serco’s 2016e guidance implies significant contract attrition (GBP500m in sales) and a near-halving of trading profit to GBP50m in 2016e,” it said.

“While the market was necessarily forecasting a weak 2016e given the company’s prior statements, the surprise was in the larger level of attrition (GBP500m) than guided to previously (GBP350m).”

However HSBC said it believed the share price now reflects the attrition risk after its recent trading statement, which is why it upgraded the stock.

Shares in Serco Group were up marginally at 1105 GMT, rising 0.35p (0.43%) to 82.5p.