RBC hails "underappreciated" growth potential at Serco

RBC Capital Markets has reiterated its 'outperform' call on Serco Group, saying the essential public services providers' strong execution and prospects are currently "underappreciated" by the market.

In an in-depth research report published on Tuesday, RBC highlighted Serco's "robust drivers" across and diverse business mix, where addressable markets remain large with "significant room for growth".

"Top down drivers remain strong given high public debt levels, political change, geopolitics, increased focus on matters beyond price and capability in bids and the increased use of technology. Key markets like Defence, Immigration and Health all have current structural growth drivers," the broker said.

Meanwhile, the company's business in the North American defence market has been a "major success story" over the past five years, but is overlooked by the market, it added.

"The shares have been lacklustre, despite strong financial delivery, and we believe SRP is now materially undervalued. [...] In an uncertain world and an expensive overall Business Services sector, we believe Serco warrants attention," RBC said.

The broker kept a 230p target price for the stock, which was trading 1% higher at 173.60p on Tuesday morning.