Serco shares surge to eleven year high as defence orders soar

Serco Group has placed itself firmly in the spotlight as a leading defence stock, following a sharp increase in orders within the sector. As the UK and other governments prepare to raise military expenditure, Serco has reported that more than 80 per cent of its £3.2 billion order intake for the year—equivalent to £2.6 billion—derives from defence-related contracts. This accounts for 40 per cent of total company revenue, with the figure expected to grow as both military spending and Serco’s ambitions for acquisitions in the sector expand.

Investor confidence soared with the recognition that Serco stands to benefit from the anticipated defence dividend, propelling the company’s shares to their highest level in over a decade. On Thursday, shares climbed more than 6 per cent to close at 222.75p, valuing the group at nearly £2.5 billion. Serco’s stock has now risen 60 per cent since the start of 2025, putting the low points of 2013 and 2014’s corporate crisis behind it.

For the first half of the year, Serco posted a well-above-guidance operating profit of £146 million, representing a 4 per cent increase after currency adjustments, on revenues that improved by 5 per cent to £2.4 billion. Full-year guidance was reiterated, forecasting an increase in revenue by 2 per cent to £4.9 billion. Operating profit is, however, expected to fall to £260 million from £274 million, impacted by the loss of a major immigration contract in Australia and higher employer national insurance contributions in the UK.

The latest rush of defence work has significantly invigorated investor interest, with the majority of new contracts coming from a £1 billion tri-service armed forces recruitment programme—four years in the bidding—alongside a further £1 billion in Royal Navy vessel support and training agreements. Both deals were in motion before the government’s pledge to raise defence spending to 3 per cent of GDP.

Traditionally associated with controversial immigration and prisons operations, which still make up about one third of revenue, Serco is set to tilt its focus even further towards defence. Group chief executive Anthony Kirby, who stepped up after the sudden departure of Mark Irwin, has signalled that defence is now a “high priority target sector” for acquisitions; 80 per cent of Serco’s acquisitions over the past seven years have been in this area, notably the recent $327 million purchase of Northrop Grumman’s mission training and satellite services unit in the US.

Keen to improve margins, Serco reached its 6 per cent half-year margin target, although this is expected to ease back to 5.3 per cent by year end. Kirby is now reviewing longer-term objectives, aware that critical defence work often yields margins of 10 per cent. The group is also commencing an additional £50 million share buyback, bringing the four-year cumulative total to £390 million, and has increased its interim dividend by 8 per cent to 1.45p.