FTSE 350: Government defence spending could boost outsourcers

In 2020, UK government spending as a percentage of GDP rose 3.5 percentage points to 22.4 per cent, according to the World Bank. The last time government spend was this high was in 2011, prior to the bulk of the government’s austerity programme.

Outsourcer Serco (SRP), which provides an array of services for governments around the world, has benefited hugely. In the last two years, revenue has risen 36 per cent to £4.42bn. Last year, it attributed around 16 per cent of this revenue to Covid-19 related contracts around the world.  

Management is aware these Covid-19 sales will fall in 2022 and is therefore guiding for revenue to fall to £4.2bn in 2022. However, this guidance was made before the war in Ukraine broke out and rising government military spending should help offset some of these Covid losses.

In 2021, Serco acquired WBB – a provider of advisory, engineering, and technical services to the US military – for $293mn (£225mn). Since the start of 2022 WBB has won over $100mn of contracts, including a recent $64mn five-year deal to install missile defence systems to the US Navy.

Capita (CPI) reported a 4.3 per cent fall in revenue in 2021. The company didn’t have the same Covid-19 boost Serco profited from last year. The upside is that it won’t face as tricky comparators next year and is therefore expecting “mid-single digit” growth in its core markets – thanks in part to a new Royal Navy contract signed at the beginning of the year.

Defence companies are the obvious place for investors to look when war breaks out. Outsourcers may not provide the fancy military technology, but they do organise the back breaking work that keeps governments functioning.