Liberum maintains 'buy' on Serco following pre-close update

Liberum said Serco's first half pre-close statement, posted earlier in the session, guided to trading in line with expectations, leading the broker to increase its first-half estimates for the firm.

The broker did leave its 2019 full-year earnings estimates unchanged despite expecting the Serco's order book to have increased from £12bn to roughly £13.5bn and a solid performance in the UK & Europe, "which should be cash positive in 2019".

In the Asia-Pacific region, Liberum said Australia remained "the most interesting market" for Serco, despite the country having had six prime ministers since 2010.

"The National Garrison Health contract in Australia, which could be worth up to £560m over six years, should be a key profit driver from FY20 onwards," said Liberum.

In the Middle East, Liberum was expecting a small decline in sales, while in the Americas division, the broker expected to see double-digit growth and above-group-average margins of about 7%, which it said wre particularly attractive as most contracts were cost-plus and therefore low risk.

All in all, Liberum maintained its 'buy' recommendation and target price of 150p, pointing out how Serco's shares were trading on a 2021 price-to-earnings ratio of 13.7x, which it said was "cheap" given the significant earnings momentum.

"We now expect 10p of earnings in 2021 and we believe this is very much achievable given the pace of change within the business under the current management team," concluded the analysts.