DAVY VIEW

We believe Serco is a strong secular growth story with improving free cash flow (FCF) and the ability to add in-fill and bolt-on acquisitions while also returning cash to shareholders via growing dividends and share buybacks. In our opinion, the market is too obsessed by the short-term effects of contract gains or losses, losing sight of what has been a significant turnaround. For the last six years, the stock (despite one or two false dawns) has broadly traded in the 100-130p range. We believe this significantly underestimates the growth potential and balance sheet strength. We initiate with an ‘Outperform’ recommendation.