Babcock: Cocked and Loaded for the Future

Babcock International shares were +3.5% after company reported FY underlying pre-tax profit and revenues just shy of expectations and although net debt fell 5%, so too did the order book (-5.3% to £18B).

Babcock: Cocked and Loaded for the Future

Babcock International shares were +3.5% after company reported FY underlying pre-tax profit and revenues just shy of expectations and although net debt fell 5%, so too did the order book (-5.3% to £18B). The defence and engineering contractor’s bid pipeline nonetheless grew to £13B (+23.8%), for a total of £31B in visible future revenue, indicating healthy demand for its services.  This and the reiteration of FY guidance are helping investors overlook the narrow miss in FY financials.

Babcock is a major defence contractor for the UK Ministry of Defence (MoD), maintaining the Royal Navy’s nuclear submarine facilities and major RAF airbases, and recent military confrontations (Syria, Yemen) all support a positive outlook for the company. With the National Audit Office (NAO) recently announcing that the UK is set to spend as much as £51B on nuclear rearmaments over the next decade (Babcock securing at least £4.2B, over 8 years), the company looks like it has a steady flow of service and maintenance contracts to keep its business booming.

Despite the healthy outlook, questions remain over whether future orders can be fully relied upon. While Babcock has contracts with other governments (e.g. maintenance of Australian Navy ships), as well as non-defence orders (servicing some of UK’s nuclear power plants), UK MoD contracts constitute the vast majority of company’s future revenue streams. With cost overruns and budget shortfalls endemic to defence procurement contracts (UK government is short £2.9B in the nuclear rearmament programme according to NAO), are investors being overly ebullient about company’s prospects?

War appears to be good for business and as the world gets embroiled in turmoil, defence contractors look to be on the up and up. But with UK economy showing signs of a slowdown and the outcome of Brexit negotiations still in doubt (will the long-discussed “Brexit Bill” make a hard dent in Government outlays?), are we perhaps going to see revisions to MoD programmes that will see Babcock revenue pipeline take a few painful hits?

 

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