RBC Capital lifts Serco price target after update

RBC Capital Markets lifted its price target on Serco on Friday to 200p from 190p after the company’s pre-close trading update and acquisition announcement a day earlier.

The bank said it was updating its forecasts for the trading update and guidance. RBC’s 2023 operation forecasts are largely unchanged, while the 2024 earnings per share estimate moves up around 10% and 2025 by 6%, to reflect the higher profit guidance, the EHC acquisition and a slightly lower tax rate.

The target price has nudged up as a result.

RBC noted that Serco's cash generation has been "excellent" over the last few years, which means it now has a very strong balance sheet.

"We expect it to continue to pursue bolt-on M&A but see no reason why it can't also announce a sizeable buyback at the FY numbers," RBC said. "This isn't factored into forecasts, but a circa £100m buyback, we estimate, would be 3-4% accretive."

The bank also said that despite strong execution and excellent free cash flow generation, Serco's multiple remains low, which "seems harsh to us", especially relative to the sector.

"Going forward we think more consistent mid-single digit organic growth is likely, with some margin upside from contract improvement initiatives and overhead management. Add in the balance sheet options, and we see the potential for more consistent double-digit EPS and FCF growth over the medium-term. This should allow for material re-rating potential over time."

RBC maintained its ‘outperform’ rating on the shares.