ii view: defence play Serco announces new £50m share buyback

First-half results to 30 June

• Revenue up 3% year-over-year to £2.42 billion
• Adjusted operating profit up 2% to £146 million
• Interim dividend up 8% to 1.45p per share
• New £50 million share buyback programme
• Adjusted net debt up 98% to £259 million

2025 Guidance:

• Continues to expect full-year revenues to rise by 1%
• Continues to expect full-year adjusted operating profit of around £260 million, down from 2024’s £274 million

Chief executive Anthony Kirby said:“We have delivered a strong performance in the first half, thanks to the hard work of our dedicated people, underpinning confidence in full-year guidance.

“Looking ahead, the depth of our portfolio, strong order book and growing pipeline, give me confidence that we will continue to build on this momentum. Around the world, the challenges governments face are becoming ever more complex and acute, driving demand for our services, where we are well placed in growing markets.”

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ii round-up:

Serco Group (LSE:SRP) today detailed profits marginally higher than management’s recent forecast with the government services provider also announcing a new £50 million share buyback programme. 

First-half revenues up 3% to £2.42 billion drove adjusted operating profits up 2% to £146 million, with an interim dividend of 1.45p per share and payable to eligible shareholders on 3 October, up 8% from a year ago. 

Order intake of £3.2 billion, up from £1.9 billion in H1 2024, and weighted towards the defence sector continues to support unchanged full-year management hopes for a 1% increase in revenues and adjusted operating profit of around £260 million – potentially down from 2024’s £274 million and hindered by higher UK national insurance contributions and the ending of an Australian immigration contract.

Shares for the FTSE 250 company rose 5% in UK trading having come into this latest news up around 40% so far in 2025. The FTSE 250 is up 6% year-to-date. Shares for corporate services-focused outsourcer Capita (LSE:CPI) are up by around a fifth over that time.  

Serco provides services to government departments including defence, space, immigration, justice, healthcare, and customer services both in the UK and overseas. 

Adjusted net debt of £259 million almost doubled from a year ago and follows the prior purchase of US company Northrop Grumman Corp (NYSE:NOC), a mission training and satellite ground network communications software business (MT&S). 

Expected 2025-year end adjusted net debt of £285 million is forecast given the new share buyback.  

Full-year results are scheduled for 5 March.

ii view:

Started in 1929, Serco today employs more than 50,000 people. The company, which has its headquarters in Hook, Hampshire, helps governments to design services, integrate systems, outsource case management and engineering services, and oversee assets and facilities. 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 17%, and the Middle East the balance of 4%. 

For investors, raised employee costs for its home UK market continue to overshadow full-year profits. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap. Changes of government can bring new priorities and arrangements, while reputational and executional risk in running services such as immigration detention centres should not be forgotten. 

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More favourably, a pipeline of business up 6% since late December to £11.9 billion is the highest in over a decade. Financially stretched national finances after the pandemic and the energy price crisis now likely leaves many governments looking to reduce spending and lower debt. Diversity of customer sector and geographical region exists, while a forecast dividend yield of just over 2% is not to be ignored.

On balance, and despite ongoing risks, varying government drives globally to reduce national debt should continue to prove supportive for this major UK and overseas outsourcer.  

Positives: 

• Diversity in services offered and geographical location
• New share buyback programme

Negatives:

• Raised staff costs
• Currency movements can drag on performance

The average rating of stock market analysts:

Buy