Expanding North American And European Contracts Will Unlock Future Potential

Key Takeaways

• Growth in government defense spending and strategic focus on high-margin sectors are driving revenue expansion, margin improvement, and strong order pipelines.
  
• Investments in digital transformation and geographic diversification are boosting efficiency, competitiveness, and revenue stability while reducing exposure to single-market risks.
  
• Serco faces significant risk from regulatory, technological, and competitive shifts in government outsourcing, threatening revenue stability, contract pipeline, margins, and market share.

Catalysts

Provides public services in the United Kingdom, Europe, North America, the Asia Pacific, and the Middle East.

• Structural increases in government defense spending-especially across North America, the UK, and Europe-are expanding Serco's addressable market for long-term public sector contracts, as governments seek to boost national security and resilience. This trend is supporting record order intake, pipeline growth, and higher revenue visibility.
  
• Serco's deliberate strategic focus on the defense sector (now over 40% of group revenue), along with the successful acquisition and integration of MT&S, is enhancing capabilities in high-growth, high-margin subsectors (e.g., synthetic training, network communications, unmanned/autonomous systems), driving organic growth and supporting net margin expansion.
  
• Public sector partners are looking for increasingly efficient, technology-led solutions-including outsourcing and automation-to address fiscal pressures and demand greater productivity. Serco's investments in digital transformation, AI, and operational excellence are improving efficiency and contract competitiveness, likely to further boost margins and earnings over time.
  
• Geographic expansion and diversification in high-growth regions (such as North America, APAC, and the Middle East) are broadening Serco's revenue base, reducing exposure to single-market risks, and creating new top-line growth opportunities as governments in emerging markets increase spending on critical services.
  
• Sustained high contract retention rates (95%+), deepening strategic partnerships, and a record pipeline (with ~1/3 in defense, ~1/3 in justice and migration, and the remainder in citizen services) are enhancing revenue stability and earnings visibility, positioning Serco to compound growth through both organic contract wins and selective M&A.

Serco Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Serco Group's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 3.8% in 3 years time.
• Analysts expect earnings to reach £203.0 million (and earnings per share of £0.16) by about August 2028, up from £48.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 46.0x today. This future PE is lower than the current PE for the GB Commercial Services industry at 27.8x.
• Analysts expect the number of shares outstanding to decline by 6.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Serco Group Future Earnings Per Share Growth

Risks

• Growing public and political scrutiny over private sector involvement in justice, migration, and defense-areas now making up ~85% of revenue-could result in future regulatory or policy shifts that limit government outsourcing or curtail contract opportunities, directly threatening Serco's core revenue streams and contract pipeline.
  
• Continued heavy reliance on large, multi-year government contracts leaves Serco exposed to abrupt policy changes, contract renegotiations, or retendering cycles (e.g., ending of Australia immigration contracts and postponed UK/US award adjudications), increasing earnings volatility and undermining long-term revenue visibility.
  
• Heightened focus from institutional investors and society on ESG (Environmental, Social, Governance) issues, especially around controversial sectors like immigration detention or prison services, could increase Serco's cost of capital, provoke divestment, and negatively affect its share price and access to financing.
  
• Accelerating adoption of digital government and AI-driven automation by clients risks disintermediating traditional third-party outsourcing, meaning that contract value may shrink over time as governments internalize more digital functions, which would compress Serco's addressable market and limit future revenue/margin expansion.
  
• Intensifying competition from both global outsourcing players and digital-native entrants, along with industry consolidation and rising regulatory compliance costs, could result in price competition, margin compression, and erosion of Serco's market share, negatively impacting future net margins and earnings growth.

Valuation

• The analysts have a consensus price target of £2.33 for Serco Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.73, and the most bearish reporting a price target of just £1.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £5.4 billion, earnings will come to £203.0 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of £2.21, the analyst price target of £2.33 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.