Serco rallies on RBC upgrade

Shares in outsourcing group Serco got a boost after RBC Capital Markets upgraded the stock to ‘sector perform’ from ‘underperform’, keeping the price target at 9,500p.

“Whilst risks clearly remain and the recovery will take time, for the first time in a while we see more limited downside and the balance sheet is no longer an issue post the Intelenet disposal,” the bank said.

Nonethless, RBC said there were still a number of issues with the stock, which has been hit by a string of profit warnings.

It said that gauging where the revenue base will trough is tough, and there remains some uncertainty around the Atomic Weapons Establishment contract, which accounted for £17m of 2014 EBITA and where it would expect some commentary from the government in early 2016.

In addition, the bank said the cost of exiting the remaining business process outsourcing units is still unclear.

However, RBC pointed out there were some areas of potential upside.

It said there is some scope for the final outcome on onerous contracts to be better than expected.

“Any positive contract news flow is also likely to be taken positively by the market given the lack of news flow over the last 12 months,” it said.

RBC added that the rights issue and subsequent sale of Intelenet for £200m net of liabilities has put the balance sheet in a much better position, with net debt to EBITDA reducing to around 1.0x.

At 1215 GMT, Serco shares were up 4.3% at 97.70p.