Serco consortium extends UK nuclear deterrent contract

A consortium including government outsourcing specialist Serco has won a new framework contract from the Ministry of Defence (MoD) to manage the UK’s nuclear warheads via the Atomic Weapons Establishment through to 2025.

The AWE Management Limited (AWE ML) consortium, a joint venture between Serco, Lockheed Martin and Jacobs Engineering, will be adjusted so Lockheed will take a majority 51% shareholding and Serco's and Jacobs' will both be reduced from 33.3% to 24.5%.

The updated contract includes greater flexibility to vary activity with changes in funding and other programme demands, and gives the opportunity to earn higher margins in the event of superior performance and reductions if targets are not met.

Serco, which in 2015 took a £18.6m share of profit after tax and received dividends of £17.8m, said it "will have the opportunity to maintain its returns from AWE ML at very broadly similar levels to those seen in recent years" provided stretching performance targets are met and demand continues at current levels.

Since 2000, the AWE ML's operating margin has varied between 6% and 14%, and in the last two years has been at the bottom of this range.

There will be regular pricing reviews, with the next one scheduled for 2019.

Broker Peel Hunt said the reduced shareholding implied a circa £4.8m reduction in profit after tax.