Broker tips: Currys, Serco

(Sharecast News) - Analysts at Berenberg nudged up their target price on electrical retailer Currys from 62.0p to 64.0p on Friday, stating cost control had delivered margin progression. Berenberg said Currys' interim results reflected "sound strategic execution" that had generated a "significant" adjusted underlying earnings beat versus consensus expectations.

The German bank stated management has been able to increase margins through "impressive cost control" but noted that while this was "clearly a very strong result", it had retained its 'hold' rating on the stock as it awaits further evidence of cost management and top-line growth resilience against what continues to be "a difficult macro backdrop".

Berenerg added that Currys trades on 6.8x 12-month forward price-to-earnings ratio, being one standard deviation below its trailing three-year average.

"While there is a lot to like about the H124 results, we reiterate our 'hold' rating and await further evidence of cost control against a difficult macro backdrop that brings uncertainty with it," said Berenberg.

RBC Capital Markets lifted its price target on Serco on Friday to 200.0p from 190.0p after the company's pre-close trading update and acquisition announcement a day earlier.

The bank said it was updating its forecasts for the trading update and guidance. RBC's 2023 operation forecasts are largely unchanged, while the 2024 earnings per share estimate moves up around 10% and 2025 by 6%, to reflect the higher profit guidance, the EHC acquisition and a slightly lower tax rate.

RBC noted that Serco's cash generation has been "excellent" over the last few years, which means it now has a very strong balance sheet.

"We expect it to continue to pursue bolt-on M&A but see no reason why it can't also announce a sizeable buyback at the FY numbers," RBC said. "This isn't factored into forecasts, but a circa £100m buyback, we estimate, would be 3-4% accretive."

The Canadian bank, which reiterated its 'outperform' rating on the shares, also said that despite strong execution and excellent free cash flow generation, Serco's multiple remains low, which "seems harsh to us", especially relative to the sector.

"Going forward we think more consistent mid-single digit organic growth is likely, with some margin upside from contract improvement initiatives and overhead management. Add in the balance sheet options, and we see the potential for more consistent double-digit EPS and FCF growth over the medium-term. This should allow for material re-rating potential over time."