Serco share price leaps after outsourcing sector gets City vote of confidence

Oliver Gill
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2018 will be a key year for Britain's outsourcers, UBS said (Source: Getty)

Shares in Serco popped over eight per cent today as a key City analyst concluded the future looked bright for some of Britain's support services firms.

UBS analyst Rory McKenzie said he sees "2018 as a major inflection point" after the sector has underperformed by 50 per cent since 2013.

He said: "2018 could see the start of a multi-year structural, but disciplined, expansion in outsourcing. [But] this recovery story is priced into differing degrees and so we are selective."

Serco's share price movement followed McKenzie upgrading the stock to buy. But G4S fell in opening trades after it was downgraded to neutral before regaining some ground and ending the day 1.2 per cent lower.

McKenzie said much of the recovery had already been priced into G4S' stock market valuation.

Read more: G4S shares have fallen despite a rise in profits

Support services firms have "overstretched" in recent years, McKenzie said.

"Factors behind poor performance are ending, in our view... but new teams are now turning to growth while new technologies are at a tipping point. Ahead of this, cultures have been transformed with major changes to controls and incentives.

"We believe companies' ability to price risk and manage delivery has significantly improved."

McKenzie highlighted a number of "cultural" issues at other support services firms that have been reflected in share price falls of other firms. Carillion, which has taken on a large number of support services contracts over recent years, saw its shares collapse after being forced to write down their value. Meanwhile, Mitie has been hit after watchdogs opened investigations into certain accounting practices.

UBS remained neutral on Mitie's performance.

"We struggle to see Carillion recover," McKenzie said.

Read more: FTSE reshuffle confirmed: G4S does a Newcastle United

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