Serco slumps after loss of UK nuclear warheads contract

LaToya Harding
·Contributor
·2-min read
A Serco flag is seen flying alongside a Union flag
Serco said its agreement would lapse as it returned to the direct control and management of the Ministry of Defence (MoD) from 30 June next year, sending shares 13% lower. Photo: Darren Staples/Reuters

Shares at Serco Group (SRP.L) have lost more than a tenth of their value as the outsourcer confirmed it had lost its contract with the Atomic Weapons Establishment to manage Britain’s nuclear bombs.

The company said its agreement would lapse as it returned to the direct control and management of the Ministry of Defence (MoD) from 30 June next year, sending shares 13% lower.

AWE has been managed by the AWE Management consortium since 2000, in which Serco holds a minority interest of 24.5%. AWE is responsible for the research, design, development, production and ongoing support and maintenance of the UK's nuclear warheads.

The group said that it was “proud to have been involved with AWE” for the last two decades, and that it would work with the MoD and shareholders Lockheed Martin and Jacobs to ensure a smooth transition.

US defence titan Lockheed Martin holds a 51% stake, while Jacobs has a 24.5% holding.

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“We expect that AWE will make a contribution to both Serco’s group underlying trading profit and profit after tax of around £17m ($22m) in 2020,” Serco said in a statement.

“Whilst our budgeting process is yet to be completed and the pandemic makes forecasting extremely difficult, assuming a smooth transition of AWE at the end of June 2021, we would expect both group underlying trading profit and profit after tax in 2021 to remain broadly in line with current consensus and at similar levels to our expectations for 2020, representing growth of around 35pc over 2019.”

Last month Serco upgraded its profit guidance for the year after winning extensions to its contracts to provide COVID-19 test sites for its work over the NHS Test and Trace programme. It said at the time that it was considering restarting dividend payments.

Joe Brent at Liberum said the contract loss was “not a total surprise.”

“The contract was initially to March 2022 but could be reviewed by the government at any point. It is not a total surprise that the contract is being terminated early as the contract was known to be problematic, with negative reports from the National Audit Office earlier this year,” he added.

Meanwhile Broker Peel Hunt reduced its estimate for the year to December 2021 from £131.8m ($170.3m) to £123.3m, but kept earnings per share unchanged at 7.9p.

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