Serco price target lifted by RBC after strong update

RBC Capital Markets has increased its price target on outsourcing company Serco (LSE: SRP) to 200p from 190p on Friday, praising its “excellent” cash generation and “strong execution” after a trading update.

The bank said consistent mid-single digit organic growth is likely going forward, with potential for double-digit EPS and free cash flow growth medium term. This could allow for a “material re-rating” of the shares over time, RBC said, maintaining its ‘outperform’ rating.

On Thursday, Serco reiterated guidance for 2023 underlying operating profit of £245m, up 3.4% year-on-year. It expects revenue to climb 5.9% to £4.8bn. The company also announced the €40m acquisition of European Homecare, a provider of immigration services in Germany with around €150m of expected 2023 revenue.

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RBC said it has marginally increased its 2023 earnings forecasts and more meaningfully upped its 2024 and 2025 estimates. Its higher price target reflects Serco’s profit guidance, the acquisition, and an assumed lower tax rate. RBC said a circa £100m buyback would be 3-4% EPS accretive but is not in its forecasts.