Babcock pulled on punches, saying it ‘strongly refutes’ what it calls ‘many false and malicious statements’ contained in the report issued by little-known trading firm Boatman Capital.
Bear raid attacks such as this are designed to drive the share price of the target company lower, allowing the trader to profit from its short position.
Babcock's defence announcement today appears to be doing its job, with shares in the £3bn-plus company rallying close to 3.5% to 621.2p. But that compares to 717p levels before Boatman Capital's note was released, although that decline also coincides with a widespread stock market sell-off.
BABCOCK ATTACKED OVER DEFENCE
Boatman Capital alleges that relations between Babcock and the UK Ministry of Defence (MoD) had deteriorated significantly, calling it ‘terrible’ and was a threat to the company’s future.
Babcock has now batted back, saying that its relationship with the MoD ‘remains as strong as ever’. It also quotes a UK Government spokesman as saying that the MoD remains ‘committed to working with’ Babcock and other strategic suppliers.
In total the UK Government spent more than £1.7bn with Babcock last year which means it accounted for over a third of the company’s revenues, according to the company's full year results.
In its marine division Babcock is responsible for refitting 100% of the Royal Navy’s submarine fleet and 75% of the surface fleet at its own facilities. This includes the new Queen Elizabeth-type aircraft carriers.
To give some idea of the figures involved, according to Babcock’s annual report the MoD’s 10-year Equipment Plan for building and supporting surface ships is worth £20bn over the next decade while the submarine programme is worth £44bn.
In its land division it provides vehicle fleet management and support to the British Army both in the UK and abroad, while in its aviation division it provides the RAF with airbase support and aircraft engineering support.
As well as managing the MoD’s ‘kit’, Babcock provides technical and training support to over 30,000 service personnel, so it is completely embedded in the defence establishment.
TRADING UPDATE AND DEBT WATCH
In an accompanying update on trading also issued today Babcock states that, as of mid-September underlying earnings and cash generation were in line with expectations. Management also clarified its borrowings position versus earnings before interest, tax, depreciation and amortisation (EBITDA), a key metric watched by lenders.
Babcock anticipates net debt to EBITDA will be around 1.4-times by its 31 March 2019 financial year end. That would be comfortably below the rough three-times ratio where lenders begin to get concerned.
Babcock is due to release its half-year results for the period to the 30 September on 21 November.