MARKET REPORT: Scandal-hit outsourcing giant Serco dealt yet another blow as shares fall on downgrade

By Geoffrey Foster for the Daily Mail

Updated: 05:39 EDT, 7 August 2014

Scandal-hit outsourcing giant Serco came a cropper as market-makers took no prisoners on hearing that top broker Numis had downgraded to reduce from hold and slashed its target price to 295p from 360p.

The shares were sold down to 329p before closing 17.1p or almost 5 per cent lower at 336.1p after analyst Julian Cater suggested the honeymoon period since Rupert Soames was made chief executive was well and truly over.

Cater believes the market is already pricing in a significant operational turnaround post-Soames’s appointment.

Trouble: Serco was downgraded to reduce from hold and slashed its target price to 295p from 360p

Yet significant risks still exist to short-term forecasts (both operationally and from a probable £275million -375million rights issue) and it will take a considerable length of time to stabilise a business that has seen huge staff turnover, and significant contract attrition, before any sort of recovery can be delivered.

Cater’s 2015-16 earnings per share forecasts are already 14-15 per cent below consensus but he still sees a potential 20 per cent downside to his numbers after the possible loss of the Australian immigration centres contract which was expected to reap a £30million profit in 2014.

Soames was parachuted in from Aggreko this year after Serco lost a £40million  government contract for charging the taxpayer to tag dead or non-existent offenders. It was forced to repay £68.5million  for over-charging.

As international news wires reported that 20,000 Russian troops had been deployed on the Ukraine border, dealers in London went on the defensive.

The Footsie relinquished 46.32 points to 6,636.16, while the FTSE 250 shed 89.19 points to 15,262.72.

Markets fear the Russian military presence increases the risk of a full-blown invasion of Ukraine in support of pro-Russian rebels. Wall Street resisted with a rally of 13.87 points to 16,443.34.

Drugs firm Shire, in receipt of an agreed £32billion bid from AbbVie of the US, plummeted 196p to 4680p.

Sentiment was spooked after the US Treasury said it was looking into whether it had the authority to block tax inversion deals without agreement by Congress, currently deadlocked on the issue.

Shire’s deal with AbbVie hinges on the American drug makers’ plan to move its tax base to the UK.
AstraZeneca slumped 155.5p to 4190p on fears that the US Treasury could deter American giant

Pfizer having another go at AZ in November after waking away from its £55 a share bid in May.

Perennial bid favourite Smith & Nephew lost 44p to 1020p in sympathy.

A stronger gold price and buying in anticipation of pleasing quarterly figures today lifted Randgold Resources 150p to 5155p. Gold explorer Hochschild Mining put on 11.8p at 162.3p.

Slightly better-than-expected interim results helped Interserve put on 24p to 637p. Pre-tax profits of £50.2million were 36 per cent above last year’s figures and dividend per share was 10.3 per cent higher.

According to Oriel retail analyst Jonathan Pritchard, cycle-mania still grips the UK. That’s why he is has upgraded his earnings forecast for Halfords (2.6p better at 474.5p) three months before interims.

He believes trading has been unusually strong on the back of the Tour de France and perfect UK weather conditions and expects a 25 per cent rise in like-for-like cycle sales in the second-quarter.

Ahead of its promotion to the FTSE 250, Stock Spirits Group eased 1.5p to 308.5 but it is still way above its October 2013 flotation price of 235p.

Sellers dragged Trinity Mirror 4.5p lower to 186.25p. Investors fear the Daily Mirror owner could face an eventual legal bill of £12million  if it loses a hacking case brought by various celebrities. The Trinity has set aside £4m to cover legal costs.

Avingtrans lost 9p to 142.5p as its £1.1million  cash acquisition of RMDG, the aerospace business of UK listed Tricorn (1p dearer at 20p) left dealers underwhelmed. At the same time, Avingtrans said full-year trading would be broadly in line with expectations.

Shaft Sinkers jumped 1.62p or 27 per cent to 7.62p after a subsidiary signed a £37m contract to sink the Skipovaya vertical shaft for TNK Kazchrome.

The ferrochrome ore obtained will supply the Donskoy processing plant in the Aktybinsk region of Kazakhstan.

Buying on the back of a positive trading statement lifted Avon Rubber 4.5p to 664.5p. Trading has continued strongly since the end of the first six months, with full-year figures thought to be in line with expectations. WH Ireland remains a fan and has a target price of 765p.

Disposal news left HgCapital Trust cheapened 23p to 1015p. It has sold Voyage Care, an independent provider of health and social support in the UK, for £8.4million  cash.

Voyage was acquired in April 2006 and the sale represents a fall of 18.6 per cent from the carrying book value.