Serco surges on UBS upgrade to 'buy'

Serco surged on Thursday after UBS upgraded its stance on the stock as it said it was turning positive on the UK outsourcing sector following a 50% underperformance since 2013.

UBS said 2018 is likely to be "a major inflection point", with growing earnings momentum expected to drive a recovery.

"After companies spent five years on cultural transformation, 2018 could see the start of a multi-year structural, but disciplined, expansion in outsourcing. This recovery story is priced in to differing degrees and so we are selective: we upgrade Serco to buy as our key way to play this theme," it said.

Serco was bumped up from 'neutral', with the price target lifted to 145p from 125p, as UBS downgraded G4S to 'neutral' from 'buy', cutting the price target to 300p from 355p.

The bank said it sees an attractive risk/reward in Serco, with a strong sales pipeline and margin recovery secure. "Execution on turnarounds can drive a sustainable profit recovery that is not priced in at current valuations," it said.

On G4S, it said there is a somewhat attractive risk/reward, but now it has returned to stability outperformance may be less notable.

UBS retained its 'neutral' rating on Capita and Mitie, pushing the price targets up to 620p from 580p and to 285p from 280p, respectively. Meanwhile, it reiterated its 'sell' stance on Carillion, with an unchanged price target of 47p.

The bank said Mitie offers a slightly positive risk/reward skew despite re-rating year-to-date. "We remain neutral as we wait evidence of delivery on the new strategy."

As far as Capita is concerned, UBS said it still has a very wide range of potential outcomes and continued volatility is expected.

At 0940 BST, Serco shares were up 7.7% to 116.65p, G4S was down 1.9% to 283.90p, Capita was up 0.7% to 641.50p, Mitie was up 1% to 269.50p and Carillon was 2.1% higher at 46.40p.