Source: Sharecast
The broker raised its Serco price target from 350p to 400p, reiterating a 'buy' rating, and increased its Mears target from 565p to 600p, also keeping its stance on the stock at 'buy', as it argued that both companies combine resilient cash generation with attractive valuations and exposure to structural growth areas that continue to draw private‑equity interest.
Berenberg said investors should "look through" UK political noise around insourcing, noting that governments remain under pressure to deliver better services at lower cost. It expects any insourcing to be concentrated in travel, energy and water - areas where Serco and Mears have limited exposure. Instead, both groups have aligned themselves with public‑spend verticals expected to see sustained investment, including defence, compliance, immigration and justice, helping push bid pipelines to record levels.
The German bank highlighted strong free‑cash‑flow profiles across the sector, supported by capital‑light operating models and long‑term revenue visibility, stating both companies have scope to accelerate earnings per share growth through bolt‑on M&A activity and material buyback programmes.
On Serco, Berenberg said the market continues to underestimate the group's positioning, with defence now accounting for more than half of earnings and around 50% of profits coming from North America. A robust balance sheet, ongoing upgrades and a shift into higher‑margin growth areas leave Serco "entering a compounding growth period", it said.
For Mears, Berenberg pointed to a strengthening track record as its maintenance‑led division moves towards 70% of revenue by FY27. Following a successful re‑bid cycle, a large portion of future revenue has already been locked in, giving confidence in its 5% to 9% growth target and further upside as pipeline wins convert. It also said a strong balance sheet provides room for additional M&A and buybacks.
Reporting by Iain Gilbert at Sharecast.com