ii view: defence-exposed Serco serves up profit surprise
Helping to train Canada’s future aircrews and recruiting for the UK military. Analyst Keith Bowman assesses prospects for this FTSE 250 company.
17th December 2025 16:05
by Keith Bowman from interactive investor
Full-year trading update to 31 December
- Expects currency-adjusted revenues up 3% year-over-year to £4.9 billion
- Expects adjusted operating profit of around £270 million
2025 Guidance:
- Now expects revenue for the full year 2026 of £5 billion
- Now expects full year 2026 adjusted operating profit of around £300 million
Chief executive Anthony Kirby said:“The global government services market is substantial, with high barriers to entry and strong growth prospects, particularly in the defence sector.
“We are confident that our robust financial position, innovative solutions and strengthened leadership team, coupled with continued operational discipline, and growing capabilities across the group, culminate in a positive outlook for 2026.”
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ii round-up:
Government services provider Serco Group (LSE:SRP) today predicted 2026 profits above current City forecasts, aided by exposure to defence-related contracts and ongoing performance improvement initiatives.
Revenues for the full year 2025 are expected to rise 3% year-over-year to £4.9 billion, with a profit margin of 5.5%, pushing expected adjusted operating profits to £270 million. Forecast revenues of £5 billion for 2026 and a margin of 6% are expected to generate profits on the same basis of £300 million. Analysts had been estimating 2026 profits at £285 million.
Shares for the FTSE 250 company rose 7% in UK trading having come into this latest news up by around two-thirds so far in 2025. The FTSE 250 is up 7% year-to-date. Shares for corporate services-focused outsourcer Capita (LSE:CPI) are up by close to 90% over that time.
Serco provides services to government departments including defence, space, immigration, justice, healthcare, and customer services both in the UK and overseas.
Order intake of £5.5 billion for the year is weighed two-thirds towards new defence contracts, largely in the UK and US.
Increased defence exposure has been aided by Serco’s previous purchase of US business MT&S (Mission Training and Satellite ground network communications software) from Northrop Grumman Corp (NYSE:NOC).
Alongside the update, Serco also announced Mark Reid of Belgium telecom company Proximus as its new chief financial officer come early March, replacing Nigel Crossley who is retiring after 11 years.
Full-year results to 31 December are scheduled for 5 March.
ii view:
The company, which is headquartered in Hook, Hampshire, helps governments to design services, integrate systems, outsource case management and engineering services, and oversee assets and facilities. The company employs more than 50,000 people. The UK and Europe accounted for its biggest slug of revenues during 2024 at 51%. That was followed by North America at 28%, Asia Pacific at 17%, and the Middle East the balance of 4%.
For investors, increased employee costs for its home UK market continue to weigh. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap. Reputational and executional risk in running services such as immigration detention centres should not be forgotten, while changes of government can bring new priorities and arrangements.
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On the upside, a pipeline of potential business at a new decade high, points to robust demand. Financially stretched national finances following the pandemic and the energy price crisis now likely leave many governments looking to reduce spending and lower debt. Diversity of customer sector and geographical region exists, while a forecast dividend yield of around 1.8% is not to be ignored.
In all, and despite ongoing risks, varying government pushes globally to reduce national debt should continue to prove supportive for this major UK and overseas outsourcer.
Positives:
- Diversity in both services offered and geographical location
- New share buyback programme
Negatives:
- US government shutdown delayed contract wins
- Currency movements can drag on performance
The average rating of stock market analysts:
Buy
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