Serco lifts 2025 guidance and signals stronger growth in 2026
Serco has upgraded both profit and cash guidance for 2025 and set a punchy 2026 outlook. The story is steady revenue growth, better margins, disciplined cash generation, and a pipeline hitting a new decade high – all underpinned by defence-heavy wins in the UK and North America.
Crucially, guidance for underlying operating profit sits above company-compiled consensus for both 2025 and 2026. That usually warms the market.
Key numbers at a glance
| Metric | 2024 Actual | 2025 New guidance | 2026 Initial guidance |
|---|---|---|---|
| Revenue | £4,787m | c.£4.9bn | c.£5.0bn |
| Organic sales growth | (3)% | ~1% | ~3% |
| Underlying operating profit | £274m | ~£270m (margin c.5.5%) | ~£300m (margin c.6.0%) |
| Net finance costs | £33m | ~£46m | ~£50m |
| Underlying effective tax rate | 25% | ~23% | ~25% |
| Free cash flow | £228m | ~£170m | ~£160m |
| Adjusted net debt (year end) | £100m | ~£265m | ~£150m |
Note: Guidance uses average FX rates including GBP:USD 1.31 for 2025 and 1.33 for 2026. Serco expects a weighted average number of shares of 1,011m in 2025 and 995m in 2026 for basic EPS.
What is driving the 2025 upgrade?
- Revenue: c.£4.9bn, up 3% at constant currency with ~1% organic growth. New and expanded contracts in defence, justice and citizen services more than offset lower immigration revenues.
- Profit: underlying operating profit now expected to be around £270m with a 5.5% margin, helped by productivity gains and contract ramp-ups. There is a currency translation headwind of c.£6m.
- MT&S acquisition: expected to contribute c.£8m in seven months of ownership after c.£7m transaction and integration costs, with the integration described as successful.
- Headwinds contained: higher UK national insurance, the end of an immigration contract in Australia, and lower immigration activity in UK & Europe have been offset by efficiencies and better contract performance.
- US backdrop: the US Government shutdown ended and did not materially affect trading, though it delayed some awards and protest resolutions.
Order intake, pipeline and the defence tilt
Order intake is expected to be around £5.5bn, giving a book-to-bill of at least 110% (book-to-bill over 100% means more orders were won than revenue delivered – a positive for future growth). Around two thirds of awards were in defence, weighted to the UK and North America.
Major wins in the second half included retention of HMP Dovegate in the UK, support for Canada’s Future Aircrew Training Programme, and a new justice transport contract in Victoria, Australia. The pipeline has expanded to a new decade high, reflecting healthy demand for outsourced, complex frontline services.
Cash, debt and shareholder returns
Free cash flow is now guided to around £170m for 2025 with cash conversion of approximately 90%. That is strong for a services business and underpins balance sheet resilience.
Adjusted net debt is expected to rise to c.£265m at year end (from £100m in 2024), mainly due to the £246m MT&S acquisition and the latest £50m share buyback. Even so, leverage is forecast to be c.0.9x net debt to EBITDA – below Serco’s medium-term target range of 1-2x, leaving headroom.
The £50m buyback launched in August 2025 has been completed, taking total buybacks since 2021 to c.£390m. The Board will review the capital position at the full year in line with capital allocation priorities.
2026 guidance: higher margin, faster organic growth
For 2026, Serco guides to c.£5.0bn of revenue, with improved organic growth of c.3% and continued weighting to defence. Underlying operating profit is guided to ~£300m and margin of c.6.0% – the top end of the medium-term range of 5-6%.
Drivers include full-year contribution from MT&S, contract ramp-ups and productivity/efficiency initiatives, partially offset by further anticipated reductions in immigration activities in the UK & Europe and Australia.
- Net finance costs: ~£50m (up slightly on 2025 after funding MT&S).
- Tax: underlying effective tax rate of ~25%.
- Free cash flow: around £160m, in line with the medium-term aim of at least 80% trading cash conversion.
- Adjusted net debt: expected to fall to ~£150m by year end 2026.
Guidance vs consensus: a clear beat
Serco cites company-compiled consensus for underlying operating profit of £263m in 2025 (range £260m-£267m) and £285m in 2026 (range £279m-£301m). The company’s guidance of ~£270m for 2025 and ~£300m for 2026 sits above the midpoints on both years. That should be taken positively.
Portfolio moves and leadership bench
Serco sold its Hong Kong operations in September 2025 (around 1% of Group revenue) to sharpen strategic focus. The Mubadala joint venture is now mobilised in the Middle East, improving access in that region. Integration of MT&S is complete, enhancing defence capabilities in North America and internationally.
Leadership has also been refreshed: Michael LaRouche is CEO of North America and Fiona Walters will become CEO, UK & Europe in Q1 2026, bringing international experience and a growth focus.
Operational progress: safety, attrition and retention
The update highlights around a 20% reduction in colleague safety incidents, significantly fewer lost days, improving attrition, strong engagement, and high customer retention. These may not grab headlines, but they are important indicators of operational discipline – particularly on complex government contracts where execution risk matters.
Risks and watchouts
- Immigration revenues: Serco flags lower activity in UK & Europe and Australia, with a further reduction expected in 2026. That remains a headwind.
- Procurement timing: US award delays and protest resolutions can shift timing, even if fundamentals are intact.
- Costs of capital and tax: net finance costs rise to ~£50m in 2026, and the tax rate steps up to ~25%.
- Integration and delivery: while MT&S integration is said to be successful, benefits still rely on execution, ramp-ups and productivity gains.
- Currency: a c.£6m translation headwind hit 2025 profit; FX remains a variable given the global footprint.
My view: quietly confident, defence-led momentum
This is a confident update. Profit and cash guidance are higher for 2025, leverage remains modest at c.0.9x, and the 2026 guide points to margin at the top end of the range with better organic growth. The defence tilt – roughly two thirds of 2025 awards – is doing the heavy lifting, and the pipeline is at a new decade high.
The negatives are manageable: immigration revenues are shrinking, finance costs and tax will nibble away at earnings, and procurement timing can be lumpy. But efficiency gains, MT&S contribution and contract ramp-ups give Serco a good platform for 2026. With the Board set to review capital allocation at the full year and debt expected to fall again in 2026, optionality looks intact.
What to watch next
- Full-year results: detail on capital allocation and any update on buybacks or leverage targets.
- Margin trajectory: progress towards c.6.0% and where efficiencies are coming through.
- Defence contract ramp-ups: timing and contribution from the larger awards cited.
- Immigration trends: pace of decline and whether other segments fully offset.
- Cash conversion: sustaining 80%+ trading cash conversion through 2026.
