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Highlights:
Serco loses long-running Australian immigration detention contract after rebid.
The company estimates an additional £20 million annual labour cost increase due to recent UK tax changes.
Serco plans a change programme to manage contract loss and mitigate rising labour costs.
Serco Group (LSE:SRP) has faced a double setback, delivering two pieces of negative news for the market. The public sector outsourcing firm announced that it has been unsuccessful in its bid to renew its contract with Australia's Department of Home Affairs for the provision of immigration detention services. Serco has held the contract since 2009, but it will now end on December 10, 2024, with a 180-day transition-out period to hand over operations to a new provider.
Despite the company’s claim of high performance and a strong bid, Serco confirmed that the contract, which was expected to contribute £165 million in revenue and £18 million in operating profit in 2025, will no longer be part of its future financials. The loss of this contract represents a significant blow, as it accounted for approximately 6% of the company's projected operating profit for the upcoming year.
In addition to the contract loss, Serco announced the impact of the UK’s recent autumn budget on its operating costs. The changes to employer national insurance contributions, which lower the earnings threshold for contributions and increase the contribution rate, are expected to add around £20 million to Serco’s annual labour costs starting in April 2025. The company is actively exploring strategies to offset these additional expenses as part of its ongoing cost management efforts.
Serco stated that it had planned for various scenarios regarding the contract rebid and is now implementing a change programme to manage the transition period effectively. The company remains focused on ensuring a smooth handover of services while continuing to explore ways to mitigate the increased labour costs caused by the tax changes. These developments underscore the pressures faced by the company, particularly in light of the ongoing cost challenges in the public sector outsourcing market.
