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Serco buoyed by US acquisition

The UK outsourcer has acquired a US naval contractor, increasing its international revenue mix and exposure to fast-growing markets
May 29, 2019

With the US intending to expand its naval fleet from 280 to 355 ships by 2034, Serco (SRP) is seeking to capitalise on one of the fastest growing areas of public procurement. Having provided services to the US navy for almost 30 years, it is no stranger to the sector. In acquiring the naval systems business unit (NSBU) of Alion Science and Technology Corporation for $225m (£173m), the group has enhanced the scale and capability of its existing US defence business, becoming a top-tier supplier.

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Bolstered by NSBU’s design, engineering and 'through-life support' skillset, Serco will be able to offer services covering the entire lifecycle of a ship, exploiting increased budgets for both new builds and sustainment – for every $1m spent on building a naval ship, $2.3m is spent on maintenance and modernisation.

Bringing an order book of around $600m and new business pipeline of over $2bn, NSBU is expected to furnish approximately $370m in revenue and $28m in cash profits in the first full year of ownership. Increasing the group’s weighting towards large and faster-growing markets, the proportion of group revenue derived from defence services will rise from 30 to 35 per cent, while the Americas region is expected to contribute 26 per cent of overall revenue (from 20 per cent).

As uncertainty pervades the UK outsourcing industry, geographical diversification offers shelter from individual market challenges. Sourcing 46 per cent of group revenue from the UK compares favourably with competitors who are overwhelmingly reliant on the domestic market – Mitie (MTO) derives 95 per cent of its revenue from the UK. While non-discretionary UK services permit a defensive position, Serco believes its £2.9bn order intake (80 per cent of which is from outside the UK) should enable outperformance of the weaker UK market. Increasing its order book by 12 per cent to £12bn in 2018, contract win momentum differentiates it from rivals. Capita’s (CPI) contract losses outweighed contract wins in 2018 and Mitie anticipates a 10 per cent order book decline for FY2019.