ii view: optimism grows at outsourcer Serco

First-half trading update to 30 June

• Expects revenue up 2% year-over-year to around £2.4 billion
• Expects adjusted operating profit of at least £140 million

2025 Guidance:

• Now expects full-year revenues to rise by 1%, up from a previous flat estimate
• Continues to expect full-year adjusted operating profit of around £260 million, down from £274 million in 2024

Chief executive Anthony Kirby said:

"Serco has delivered a strong first-half performance, with positive organic revenue growth, and good margins, despite known headwinds in immigration markets.

"I remain confident in our outlook and guidance for 2025.  In my first few months as CEO, I have seen at first-hand the structural drivers of long-term demand in our markets, most notably in defence, justice, migration and citizen services. With our strong financial position, I believe we are well positioned to pursue opportunities to enhance future growth and deliver continued value to our shareholders."

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ii round-up:

Government services provider Serco Group (LSE:SRP) today raised its sales forecast given strength in demand for defence services and better than expected demand for immigration services. 

Hampshire headquartered Serco now expects growth in annual revenue stripped of acquisitions of 1% to £4.9 billion, up from a previous forecast for a flat outcome. Management continues to expect annual adjusted operating profit of £260 million, down from £274 million in 2024, hindered by higher UK national insurance contributions and the ending of an Australian immigration contract. 

Shares in the FTSE 250 company rose 2% in UK trading having come into this latest news up by just over a quarter so far in 2025. That’s comfortably ahead of a 3% rise for the FTSE 250 index. Shares in corporate services focused outsourcer Capita (LSE:CPI) are up by close to a half year-to-date.  

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

Order intake of £3 billion during the first half to late June is expected to help take half-year revenue up 2% to £2.4 billion. Adjusted profit is expected to come in at £140 million, potentially down from last year’s £142 million. 

Expected group net debt of £325 million is up from £100 million at the end of December, and follows on from the recent acquisition of MT&S, the mission training and satellite ground network communications software business of American giant Northrop Grumman Corp (NYSE:NOC). 

Alongside the trading update, Serco also announced the appointment of Keith Williams to the board as a non-executive director and board chair designate. Currently Chair of Halfords Group (LSE:HFD), Williams will become Serco chairman from 1 January 2026.

First-half results to 30 June are due to be announced on 7 August. 

ii view:

Founded in 1929, Serco today employs more than 50,000 people. It helps governments to design services, integrate systems, outsource case management and engineering services, and oversee assets & 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 are hindering profits. Changes of government can bring new priorities and arrangements. Reputational and executional risk in running services such as immigration detention centres cannot be ignored, while currency risks given more than a half of sales generated overseas warrant consideration.  

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To the upside, exposure to defence services such as servicing military jets and an acquisition which strengthens exposure should provide robust demand. Financially stretched national governments and the energy price crisis now likely leave many politicians looking to reduce spending and lower debt. Diversity of customer sector and geographical region exists, while a forecast dividend yield of 2.3% is not to be ignored.

In all, and despite ongoing risks, varying government pushes globally to reduce national debt should continue to be supportive for this major UK and overseas outsourcer.  

Positives: 

• Diversity of both services offered and geographical location
• Previous share buyback programme

Negatives:

• Raised staff costs
• Currency movements can drag on performance

The average rating of stock market analysts:

Buy