Serco Declines on Outlook for Contract Renewals: London Mover

Serco Group Plc, the U.K. services company whose operations include prisons and London’s Docklands Light Railway, fell for a fourth day on concern it might not win bids to renew some of its largest public-sector contracts.

The shares dropped as much as 1.6 percent and closed down 0.1 percent at 570.5 pence, extending the four-day decline to 3 percent, the biggest fall since Nov. 13. That pared Hook, England-based Serco’s gain to 6.6 percent this year, trailing rivals including G4S Plc and Capita Plc.

Serco was cut to neutral from overweight yesterday by Alex Magni, an analyst at HSBC Holdings Plc, on prospects for U.K. public-sector business in 2013. Deals coming up for renewal make up about 12 percent of Serco’s run-rate revenue, Magni said in a note to clients. The company will face margin pressure on its Northern Rail contract, which accounts for about 6 percent of group revenue, he said.

“Serco faces an unusual amount of contract retendering this year, with as much as 590 million pounds ($898 million) of run-rate revenues up for renewal,” Magni said. “We see meaningful uncertainty on three of its four major contract rebids.” He lowered his 12-month price target on the shares to 590 pence from 635 pence.

Outsourcing Business

Serco is scheduled to publish full-year results for 2012 on March 5. The company will report an increase in sales, earnings and gross margins, according to analyst estimates compiled by Bloomberg.

“Despite the hype, Serco, along with most of the rest of the outsourcing sector, has had scant new business from the U.K. public sector in nearly a year,” Magni said. “Our analysis suggests this may continue in 2013.”

Capita, which provides services for the U.K.’s Justice Department, today reported 2012 earnings that beat analyst estimates as its underlying operating margin narrowed. The company’s shares fell the most in a month.

“Serco is well-positioned to deliver above-average organic growth, and should continue to improve its margins,” Mike Allen, an analyst at Panmure Gordon & Co. with a buy recommendation on the stock, said in a note yesterday.

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