Serco Stutters as Jefferies Downgrade Shares to Hold and Trims Target

Serco Group shares (LON: SRP) are falling today, down 3.10% in early trading after as Jefferies analyst Allen Wells downgraded the stock from “Buy” to “Hold,” while also lowering the price target to 175 GBp (previously 225 GBp).

The analyst pointed to challenges stemming from immigration contracts and UK national insurance policies, which have acted as headwinds for the company's shares.

According to Jefferies, Serco's “nearer-term earnings and free cash flow momentum looks more muted,” with challenges in its largest contracts being “unhelpful.” These factors prompted the firm to temper expectations, leading to the downgrade. While Serco remains a strong player in its sector, the immediate outlook suggests a battle to shift sentiment after a difficult 12 months.

Down Through 2024, More of the same?

Through the last year, Serco, a global provider of public services, experienced mixed performance. While the company continued to secure large-scale government contracts across sectors such as defense, healthcare, and justice, it faced significant pressure on its largest contracts.

These pressures, combined with external challenges like changes in immigration policy and adjustments to UK national insurance, dampened investor sentiment. Despite strong operational capabilities, the company's stock underperformed as concerns about earnings and free cash flow momentum grew.

Whilst the latest price target shift from Jefferies is to the downside, with Serco's share price at 147.20p, there remains more than 15% potential upside to the new mark of 175p. Whether sentiment can shift as the year progresses and help fuel a rally is yet to be seen, but with the analyst community seeing consensus on target of 209p, there is expected to be some growth. Deutsche Bank are another to have shifted outlook in recent days, with an increase in target to 190p from 185p.

As Serco continues to navigate headwinds, the focus will likely remain on operational efficiency and mitigating risks in its largest contracts to restore investor confidence and sustain long-term growth.