Serco shares plummet on tax warnings and Australian contract loss

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

The company said its rejected bid to renew a contract for immigration detention facilities and detainee services on land was expected to earn the company £125 million in revenues and £18 million in underlying operating profits by 2025 – around 6 percent of forecasts analysts 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 direct staff costs by an estimated £20 million.

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

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

It follows similar warnings from other major companies, with Sainsbury’s claiming the NI tax raid would cost it £140m next year, BT Group saying costs would rise by £100m, and Morrisons estimating its bill at £75m.

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

Had it stuck to the contract, the company believes it would have brought in around £165 million in revenue and £18 million in underlying operating profits next year.

Instead, it plans to pursue a “change program” that will reduce costs during the 180-day transition period after the contract expires on December 10.

“We have submitted what we believe to be a compelling bid that would have delivered sustained strong performance to the Australian government and met our framework for achieving margins appropriate for the services we provide,” the report said.

Serco has operated immigration services in Australia since 2009, in addition to several prisons; it currently manages the Clarence Correctional Center and Acacia Prison, the two largest prisons in the country.

In Britain it runs five prisons, including resettlement sites HMP Doncaster, Yorkshire; HMP Fosse Way, Leicestershire; and HMP Thameside, South East London.

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

For the six months ended June, Serco reported that its turnover at constant exchange rates fell 3 percent to £2.4 billion, partly due to the termination of some low-margin contracts in Britain.

Underlying operating profit also fell 4 percent to £142 million, which the group blamed on a new US contract for healthcare services, immigration volumes in Australia and mobilization costs associated with new work.

Shares in the Hampshire-based company were 9.1 lower at 161.2p by early afternoon, making them the second biggest fallers on the FTSE 250 Index after Vistry Group.