Broker tips: Serco, Rightmove, Staffline

Analysts at Liberum maintained their 'buy' rating on public services provider Serco on Thursday, noting that the group's current share price was "cheap" given its "significant earnings momentum".

Liberum said Serco's first half pre-close statement, posted earlier in the session, guided to trading in line with expectations, leading the broker to increase its first-half estimates for the firm.

The broker did leave its 2019 full-year earnings estimates unchanged despite expecting the Serco's order book to have increased from £12bn to roughly £13.5bn and a solid performance in the UK & Europe, "which should be cash positive in 2019".

In the Asia-Pacific region, Liberum said Australia remained "the most interesting market" for Serco, despite the country having had six prime ministers since 2010.

"The National Garrison Health contract in Australia, which could be worth up to £560m over six years, should be a key profit driver from FY20 onwards," said Liberum.

In the Middle East, Liberum was expecting a small decline in sales, while in the Americas division, the broker expected to see double-digit growth and above-group-average margins of about 7%, which it said wre particularly attractive as most contracts were cost-plus and therefore low risk.

All in all, Liberum maintained its 'buy' recommendation and target price of 150p, pointing out how Serco's shares were trading on a 2021 price-to-earnings ratio of 13.7x, which it said was "cheap" given the significant earnings momentum.

Rightmove was under pressure on Thursday as UBS downgraded its stance on the shares to 'sell' from 'neutral', saying the company is likely to struggle to accelerate average revenue per agent growth amid a weak UK housing market.

The bank, which nudged its price target up to 505p from 500p, said the stock has continued to rise since it downgraded it back in March, and is up 30% year-to-date.

UBS said its valuation model suggests the market is pricing in 7-8% FY18-28E revenue compound annual growth rate.

"Sustaining 7-8% growth rates requires Rightmove to accelerate average revenue per agent growth from £85 per annum (FY19E) toward £120.

"Given a weak UK housing market (low price growth, commission rates under pressure, declining volumes), we think this will be challenging."

UBS said that weak advertiser numbers in 2019 could be a catalyst for a de-rating.

Analysts at Berenberg lowered their recommendation on the shares of the UK's biggest recruiter Staffline to 'hold' from 'buy' on Thursday and slashed their target price, citing a series of "significant challenges to overcome".

Staffline, which had belatedly released its 2018 annual results earlier in the session, noted its outlook for 2019 remained challenging.

Berenberg highlighted how Staffline had stuck to its recently reduced guidance for underlying earnings of £23-28m, the same range that it had guided towards on 17 May on the bak of a shift in its customers' demand profiles away from temporary workers, a slowdown in demand in higher-margin sectors such as automotive and driving, and a weaker-than-expected pick up in demand for work under the Apprenticeship Levy.

While Staffline's 2018 numbers were actually in line with prevailing expectations, with staffing revenue coming in at £1.02bn, up 21% year-on-year, a tough macro environment and the company's exposure to retail and automotive-focused assets saw the group turn in lower organic growth.

The German broker also noted that no further comments had been made regarding the National Minimum Wage review, with Staffline's management seeing the issue as "resolved".

"With a market cap of c£42m and an EBITDA multiple of 4.5x for 2019 and 3.2x for 2020 the shares have priced in a lot of the negativity – understandably, given the high level of uncertainty," said the analysts, who also slashed their price target on the firm from 1,250p to just 150p.

"However, these are significant challenges to overcome and we expect the stock to remain a special situation for the foreseeable future."