Serco due for contract win and 'inflection year', says Jefferies

Serco's fortunes should see an "inflection" in 2019 after the outsourcer won its largest contract in almost two years, analysts from Jefferies said on Wednesday.

Jefferies, which reiterated a 'buy' recommendation and price target of 123p, reckoned that Serco has won a £500m, six-year contrac with Garrison Health Services after a MediBank press release suggested it has not retained the contract and so implying the competing Serco/Bupa bid has won.

Garrison Health is the second-largest opportunity in Serco’s bid pipeline, has £500m total contract value over six years, making it the FTSE 250 group’s largest win since the first half of 2017.

Jefferies' model assumes the contract begins on 1 July and will contribute 1.5% to organic revenue growth in 2019 and 2020 fiscal years.

Analysts see an inflection for Serco in 2019 as organic revenue growth and free cash flow are both forecast to turn positive, with the dividend restored and larger elements of the bid pipeline such as Garrison are awarded.

With a Jefferies EPS estimate 10% ahead of consensus, the analysts believe free cash flow normalisation and margin recovery acceleration will derate the shares to 13 times earnings and 8% FCF yield in the 2020 financial year.