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The Expert View: Serco, Britvic, De La Rue

A round-up of analysts’ commentary on shares, also including Keller Group and Vectura.

Our daily round-up of analyst recommendations and commentary, featuring Serco, Britvic, De La Rue, Keller Group and Vectura .

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Key stats
Market capitalisation£2,346m
No. of shares out499m
No. of shares floating484m
No. of common shareholdersnot stated
No. of employees96113
Trading volume (10 day avg.)2m
Turnover£4,913m
Profit before tax£245m
Earnings per share48.78p
Cashflow per share68.20p
Cash per share28.65p

*Correct as at 19 Dec 2013

Serco a ‘sell’ as government prepares to get tough

Outsourcing company Serco (SRP.L) will not see its ‘sell’ rating budge after a poor 12-month trading update and concerns over punishment from the government, says Cantor.

Cantor analyst Caroline de La Soujeole retained a ‘sell’ rating and placed a target price of 380p on the shares.

In its pre-close statement Serco confirmed that its full-year numbers ‘should not be materially different from previous guidance, which infers to us numbers may come in a bit light of expectations,’ said de La Soujeole.

Even more concerning was the likely outcome of the Cabinet Office’s investigation into government contracts. It is expected to announce that neither Serco, nor its peer G4S (which remains a ‘hold’) will be considered for ‘significant contracts’ in the short term. Government contracts make up 40% of Serco’s sales.

‘[News articles] suggest that Serco’s repayments to the government would be higher than previously suggested,’ said de La Soujeole. ‘If this press report proves to be accurate, it justifies our cautious stance on G4S and also underpins our belief that there is further bad news to come for Serco.’

Shares fell 27p, or 6%, to 476.6p on Thursday.

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Key stats
Market capitalisation£890m
No. of shares out100m
No. of shares floating100m
No. of common shareholdersnot stated
No. of employees4000
Trading volume (10 day avg.)0m
Turnover£484m
Profit before tax£37m
Earnings per share36.94p
Cashflow per share64.05p
Cash per share24.86p

*Correct as at 19 Dec 2013

Move to plastic banknotes to hit De La Rue

The Bank of England’s decision to ditch paper banknotes in favour of plastic polymer will hit secure document specialist De La Rue (DLAR.L).

Numis analyst Charles Pick retained his ‘hold’ rating and target price of 854p.

He said it remains to be seen whether De La Rue retains the £1 billion contract to print UK banknotes and even if it does the fact that paper banknotes will no longer be required will see some loss of revenue.

‘The news that the Bank is to adopt polymer-based banknotes will not be a surprise. What is a surprise is that Innovia Security is to provide the polymer substrate,’ said Pick. ‘So even if De La Rue retains the £1 billion per annum banknote printing contract it will see some indirect loss of revenue from 2016 as less banknote paper will be progressively required.’

The odds are in De La Rue’s favour for keeping the printing contract as ‘few parties have the capabilities to undertake such a large banknote print contract and no other commercial printer has expertise at printing both paper and plastic substrates’, said Pick.

Shares closed up 16.5p, or 1.8% at 904.5p on Thursday.

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Key stats
Market capitalisation£479m
No. of shares out340m
No. of shares floating330m
No. of common shareholdersnot stated
No. of employees216
Trading volume (10 day avg.)1m
Turnover£31m
Profit before tax£-6m
Earnings per share-1.77p
Cashflow per share0.42p
Cash per share20.96p

*Correct as at 19 Dec 2013

Christmas bonus for Vectura target price

Peel Hunt has upgraded biotech firm Vectura’s (VEC.L) target price after approval of a new lung drug.

Analyst Stefan Hamil retained his ‘buy’ rating and increased the target price from 161p to 171p as the approval of AirFluSal in Europe was a Christmas bonus.

AirFluSal is a generic copy of Glaxosmithkline’s $8-billion drug Advair – which is an inhaled lung drug. The move suggests a greater reliance on generic programmes, which is when a drugs company makes replicas of drugs whose patents have expired.

Hamil said the approval ‘was an upside surprise for the market, which we see as risk-adjusting Vectura’s generic programmes more heavily than we are’.

‘The increased confidence in Vectura’s generic programmes and capabilities drove the shares up to an all-time high of 137p,’ said Hamil. ‘We see further positive momentum in the months ahead.’

Shares closed up 3.7p, or 2.7%, at 141p on Thursday.

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Key stats
Market capitalisation£811m
No. of shares out71m
No. of shares floating68m
No. of common shareholdersnot stated
No. of employees7500
Trading volume (10 day avg.)0m
Turnover£1,318m
Profit before tax£30m
Earnings per share45.04p
Cashflow per share112.37p
Cash per share88.65p

*Correct as at 19 Dec 2013

Keller management on track, but face headwinds

Liberum retains its ‘hold’ rating for ground engineering company Keller Group (KLR.L) following a meeting with management.

Analyst William Shirley has placed a target price of £10.50 on the shares and said they were ‘fairly valued’ for now.

‘Following a detailed meeting with management earlier in the week we leave our forecasts unchanged,’ he said. ‘Keller has momentum – earnings per share upgraded 38% over the last 12 months – and ongoing recovery potential.’

However, Shirley said there are ‘headwinds’, including ‘benign weather/contract performance drove ‘one-off’ benefit of £7-8 million in 2013…the completion of major UK and Australia contracts in 2014 leaves a potential hole in 2015’.

Shares closed up 40p, or 3.6% at £11.44 on Thursday.

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Key stats
Market capitalisation£1,674m
No. of shares out246m
No. of shares floating226m
No. of common shareholdersnot stated
No. of employees3337
Trading volume (10 day avg.)0m
Turnover£1,322m
Profit before tax£62m
Earnings per share25.30p
Cashflow per share43.16p
Cash per share43.62p

*Correct as at 19 Dec 2013

Britvic will have to work hard to recreate 2013

Soft drinks maker Britvic (BVIC.L) remains a ‘hold’ for Investec analysts following a ‘remarkable 2013’.

The price of shares are set to close 65% ahead and analyst Nicola Mallard has increased the target price to 672p from 600p.

Britvic’s decision not to merge with Barr earlier in the year means it is changing its strategy alone but Mallard said if the company delivers against its promises it ‘should produce further step changes in margins and profitability in the coming years’.

She said: ‘Cost reductions, if delivered and retained, should deliver some decent margin accretion. However, the real test of success will lie in consistently delivering profitable revenue growth, something it has yet to prove.’

Shares closed down 14.5p, or 2p, at 674p on Thursday.

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