- First-half ‘beat’
- New £50 million buyback
- Defence sector momentum continues
Government outsourcing leader Serco (SRP) was among the top FTSE 250 risers in early dealings after delivering better-than-expected first-half results and announcing a new £50 million buyback.
Shares in the company bounced 8.2% to a 10-year high of 226.6p as Serco revealed a 9% rise in its order book, although the company prudently left full-year profit guidance unchanged due to higher UK national insurance costs and the loss of its Australian immigration contract.
FOCUSED ON DELIVERY
Led by CEO Anthony Kirby, Serco reported a 5% uptick in revenues to £2.4 billion for the half ended 30 June 2025, in line with recent guidance and boosted by 9% organic growth in North America.
Underlying operating profit came in 2% higher at a forecast-beating £146 million and drawing confidence from its healthy free cash flow, Serco announced a new £50 million share buyback and bumped up the half-time dividend by 8% to 1.45p.
Investors welcomed news of a 9% rise in its order book over the half to £14.5 billion, underpinning the company’s full-year and long-term forecasts.
POWERED BY DEFENCE
First-half highlights included the clinching of large contracts in recruitment for the UK Ministry of Defence and for Marine services to the Royal Navy. ‘In recent years we have focused on increasing our defence capabilities, building on our 60 year history - through both organic and acquisitive growth - which positions us well to benefit from recent market drivers,’ insisted Serco.
‘Our £2 billion global defence business generated over three quarters of our strong order intake during the first half, underpinning our confidence in this market.’
Kirby pointed out: ‘Revenue growth, profit and cash generation have all been robust, reflecting stronger organic growth, driven primarily by our defence-focused North American business. During the period, order intake of £3.2 billion delivered a strong book-to-bill of more than 130%, which is heavily weighted to the defence sector.’
EXPERT VIEWS
Despite the strong first-half showing from Serco, Shore Capital’s Robin Speakman is lukewarm on the name with a ‘hold’ rating.
While he commended the company’s overall performance in a challenging environment, outside of the defence sector, he retains ‘concerns that efficiency is not Government’s main priority in the medium-term; with material pressures on budgets, cutting expenditure and therefore axing services where possible is to the fore, in our view.’
Speakman added: ‘Whilst we see long term opportunity for outsourced services to Government, particularly in defence and security segments, we remain cautious on other public sector service areas for the moment. We await to see how other opportunities develop in maintaining the positive book to bill ratio to see a return to yet stronger organic development.’
AJ Bell head of financial analysis Danni Hewson said: ‘Earnings came in ahead of the guidance given less than a couple of months ago with the defence sector now the biggest contributor to the group.
‘However, the impact of the loss of a contract to provide immigration detention services in Australia and higher operating costs in the UK as the group absorbs higher employer national insurance contributions means full-year guidance is unchanged despite the first-half beat.’
Hewson continued: ‘Serco cannot rely on defence alone and pressures on government spending in the developed world are a risk the market will be watchful of going forward.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
