Serco shares dive on tax warning and Australian contract loss

Serco shares slumped on Friday after the outsourcing giant warned of higher labour costs and the loss of a lucrative Australian immigration contract.

The firm said its rejected bid to renew a contract for onshore immigration detention facilities and detainee services was projected to net the firm £125million in revenues and £18million in underlying operating profits in 2025 – roughly 6 per cent of analysts’ forecasts for annual performance. 

Serco also said changes to employers’ national insurance rates announced by Chancellor Rachel Reeves in her first Budget last week would increase its direct staff costs by an estimated £20million.

Dive: Serco shares slumped on Friday after the outsourcing giant warned of higher labour costs related to Rachel Reeves announcing a hike in national insurance contributions

From April 2025, the employers’ NI rate on salaries is set to rise by 1.2 percentage points to 15 per cent, while the threshold at which businesses start paying NI will go down from £9,100 to £5,000 a year.

Serco said it was ‘actively exploring ways to offset these costs’ but has maintained its annual guidance.

It follows similar warnings by other major firms, with Sainsbury’s claiming the NI tax raid would cost it £140million next year, BT Group saying its costs would go up by £100million, and Morrisons putting its respective bill at £75million.

Serco also revealed it had lost a contract to manage onshore immigration detention facilities and detainee services on behalf of the Australian Government.

Had it held onto the contract, the company believes it would have brought in about £165million of revenues next year and £18million of underlying operating profits.

Instead, it intends to pursue a ‘change programme’ that will cut costs during the 180-day transition period following the contract’s expiration on 10 December.

‘We submitted what we believed to be a compelling bid that would have delivered continued strong performance to the Australian government as well as meeting our framework for achieving margins appropriate for the services we deliver,’ it said.

Serco has operated immigration services in Australia since 2009 alongside several prisons; it currently manages Clarence Correctional Centre and Acacia Prison, the country’s two largest jails.

In the UK, it looks after five prisons, including the resettlement sites HMP Doncaster, Yorkshire; HMP Fosse Way, Leicestershire; and HMP Thameside, South East London.

In addition to prisons, the business has contracts to provide defence, health, leisure, transport, and waste management services for the public sector.

For the six months ending June, Serco reported its turnover shrank by 3 per cent at constant currency levels to £2.4billion, partly due to the exit from some low-margin contracts in Britain.

Its underlying operating profit also fell by 4 per cent to £142million, which the group blamed on a new US healthcare services contract, immigration volumes in Australia and mobilisation costs related to new work.

The Hampshire-based company’s shares were 9.1 lower at 161.2p during the early afternoon, making them the FTSE 250 Index’s second-biggest faller behind Vistry Group.