Serco Share News (SRP)

(Sharecast News) - Berenberg initiated coverage of Mitie and Serco on Wednesday with a 'buy' rating as it said the outsourcers are "leaders in their fields and often dominate market share".

The bank said governments and industry are under pressure to provide better services for less and this is driving demand for higher-quality services at lower cost.

"Contracts have grown in complexity and the investment in technology and the scale of both Mitie and Serco allows them to leverage their operational expertise to provide a better, more efficient and cost-effective service for their clients," it said.

It set a 160p price target for Mitie, pointing to "mighty growth" and shareholder returns.

"The company operates a capital-light model against a robust backdrop for market growth for UK Facilities Management; it has strong revenue visibility and a dominant market share position of circa 13%, more than double that of its nearest competitor," it said.

"Mitie has built a robust platform and is now executing its growth strategy, a three-year plan for FT. With a strong balance sheet and competitive advantage through its scale and its digital-first, technology-backed model, Mitie is positioned strongly to benefit from structural tailwinds."

Berenberg set a 200p price target for Serco, which it called a "long-term structural winner".

It noted that Serco is a pure B2G (business to government) operator, supplying government bodies at the local, regional and state level.

"It is one of the largest providers of outsourcing services, employing over 50,000 people in more than 30 different countries.

"The group has a well-diversified portfolio, with more than 500 contracts covering a vast range of services across its international footprint.

"The company's capital-light model and revenue acyclicality provides an attractive returns profile."

Berenberg said Serco has a solid balance sheet and the company is generating meaningful and sustainable free cash flow at a yield of around 10%+. This is creating capital allocation opportunities for additional M&A and further buybacks and scope to maintain or increase this in the coming years, the bank said.

At 0945 GMT, Mitie shares were up 1% at 117.20p, while Serco was 0.3% higher at 151.40p.