Market Report: Serco transported to new high by US deal
Wednesday 03 July 2013
The company that operates Boris bikes, prisons and hospitals was a picture of health yesterday following news of a big contract win in the US.
Serco surged to the top of the benchmark index as rumours circulated of a $1.25 billion (£657 million) healthcare contract after a website for federal contracts released the news overnight.
Just after lunchtime yesterday, Serco acknowledged the speculation and said more details will follow. The contract is with the US Department of Health and Medicare and Medicaid, and Serco will manage applications for health plans and insurance schemes.
News of a US deal was welcomed by investors who have been concerned that the company is suffering as a result of US federal budget cuts. Last year, revenues in Serco's American business – which makes up 13 per cent of revenues – were squeezed. However, its trading update last week confirmed that the outsourcing specialist is on track to meet financial expectations for the full year, so the news of another new contract added to investors' relief.
Serco finished the day 40.5p better off at 665.5p – a 12-year high.
The wider market was not quite as healthy and hovered around the 6,300 level set the previous day. The FTSE 100 slipped 3.84 points to 6,303.94.
Yusuf Heusen, sales trader at the spread-betting firm IG, said: "In a week that [will feature] both the Independence Day holiday and non-farm payrolls, there is certainly the opportunity for a summer surge of one sort or another, but the FTSE 100's tussle with 6,300 is getting rather tedious."
The British luxury brand Burberry was in fashion with HSBC's style expert, Erwan Rambourg. He said Burberry's decision to take control of its beauty and fragrance business, expand its accessories lines and streamline its supply chain means the brand no longer trades at a premium to the luxury goods sector.
Mr Rambourg said the integration of Burberry's beauty arm and its Japanese business is the "last big legacy issue" and it is being addressed more quickly and more effectively than he had first thought. He has raised his 2015 estimates and said that although Burberry is predominantly still a clothing brand, its handbags and accessories lines – where luxury brands make the real money – has "credibility" which is "increasing every year".
Burberry's international expansion has been a success and now it has "operational excellence" and a "much better grip on its supply chain", he added. Mr Rambourg raised his rating to overweight – up from neutral – with a target price of 1,750p, up from 1,530p.
Punters are dedicated followers and it was the Footsie's second highest riser, strutting up 40p to 1,405p.
On the mid-cap index, the distribution group John Menzies said it remains on track to meet full-year expectations. However, it slipped 5p to 700p.
The soap maker PZ Cussons announced the expansion of its baby food business via the purchase of the Australian baby food brand Rafferty's Garden for £42.2m. PZ Cussons has taken advantage of the Australian competition regulator's decision to block a proposed takeover of the baby food company by Heinz. Analysts Darren Shirley and Clive Black at Shore Capital said the deal is good news for PZ. They upgraded their forecasts for 2014 to £117.5m from £114.9m and said: "After a challenging period, PZ's recent trading updates have encouragingly been accompanied with modest upgrades – momentum which has been retained post this announcement."
But they retain their hold rating, with a 365p price target, because in the short term the "geopolitical uncertainty in northern Nigeria", where it has operations, is still a concern.
PZ, which makes Imperial Leather soap, St Tropez fake tan and Sanctuary Spa products – which are advertised by Darcey Bussell (pictured) – cleaned up with an 18p rise to 373p.
The online grocer Ocado reported first-half earnings ahead of analysts' forecasts. Its shares hit a record high last month after it announced a deal in May to supply supermarket group Morrisons, but the price lost 3.2p to 309p after the company reported a pre-tax loss of £3.8m.
The small-cap building and paving specialist Marshalls reported a dip in first-half sales but said there is no change in its full-year forecast. It retreated 1p to 135.75p.
The AIM-listed mining tiddler African Eagle Resources agreed to sell its subsidiaries to Blackdown Resources, and its shares tumbled 0.25p to 0.32p.
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