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Serco secures biggest ever contract

The group has won asylum support contracts, worth a potential £1.9bn, over 10 years
January 9, 2019

After a rough few years for government outsourcing, Serco (SRP) has kicked off 2019 by gaining significant asylum support contracts from the Home Office, worth a potential £1.9bn over 10 years.

IC TIP: Hold at 113p

Serco will manage asylum accommodation and support services in the north-west, Midlands and east of England from 2020. The contract replaces the Compass contracts, which generated around £70m in revenue and £15m in cash losses annually. 

News of such a big win has fanned existing speculation that 2019 would mark a turning point for the group, as it continues to lose cash despite strong profit growth. Brokerage Shore Capital upgraded its recommendation on the group’s shares to a 'buy' following the announcement, forecasting that the contracts would lead the group to generate free cash flow of around £3m in 2019. 

However, the deal should not be viewed as an unalloyed positive. It ties the group closer to the UK government at a time when it had been emphasising the importance of geographic diversification. What’s more, a select committee report found that the government’s approach to outsourcing “deliberately promoted an aggressive approach to risk transfer to the private sector”, leading to dividend cuts, recapitalisation and tight margins. 

Mears (MER) also secured three regions from the Home Office, with contracts expected to deliver revenues of over £1bn during the 10-year term.