Jefferies raises target on Serco following 'attractive' acquisition

Analysts at Jefferies raised their target price on public services outfit Serco on Tuesday, saying the group's acquisition of Alion Science and Technology's naval systems business unit should "catalyse a shift in customer perception" and had "attractive economics".

Serco announced the $225m acquisition of Alion's naval unit on a cash/debt-free basis on 23 May, an "unsurprising development" that Jefferies said was consistent with the group's strategy and a logical exit for Alion.

The broker, which also maintained its 'buy' rating on the firm, highlighted what it said were the numerous benefits of the transaction.

Jefferies noted that although Serco's attempts to provide higher value-added services in US defence had heretofore achieved only "modest progress" and that a major breakthrough had been elusive given the group's lack of a track record.

The outsourcer's acquisition of BTP in 2018 for enhancing capability but said the Alion acquisition, which provides ship/submarine design, systems engineering and production management services, should lead to "a more meaningful shift" in customer perception, Jefferies highlighted.

"Moreover, the transaction generates $3-4m worth of cost synergies and maybe revenue synergies in international markets too," Jefferies said.

In turn, the company's EBITA margin was expected to improve from 6.0% to 7.3%.

Although the transaction was still subject to approval, Jefferies was anticipating few problems and assumed the unit would be consolidated by the end of the year.

"Consequently, FY19F suffers from dilution associated with the 10% equity placing, but FY20F benefits from a maiden revenue and EBITA contribution. FY20F EPS accretion is 9% (versus management’s 7%-9% guidance) but the impact on FCF is a more meaningful 22%."