Shares in defence and nuclear contractor Babcock (BAB) sunk to a seven-year low after half year results failed to calm shredded investor nerves over key issues.

Earlier this month the company responded to press reports that it was set to report £100m of provisions by saying that the net cash costs of restructuring would not be material.

Today it revealed £120m of provisions, £80m of which relate to ‘re-shaping’ the oil and gas business. The plan is to sell-off unwanted parts of the business and thus offset much of this cost, resulting in a net cash expenses of around £10m.

For a business of this scale - it is a near-£3bn FTSE 250 company - a net £10m hit may not appear particularly material. Evidently, investors see it differently, sending the shares plunging nearly 8% today to 546p.

FORCED SELLER

The scale of the provisions announced today is far greater than had been anticipated. This leaves Babcock in a weak position. Even if it can successfully find buyers for the bits and pieces it wants to flog, the perception of a fire sale at Babcock is unlikely to help the company get its desired price.

The grim news doesn't end there either. Further gloom comes in the shape of expected income from its 65%-owned nuclear joint venture with US firm Fluor.

The unit has been engaged in the de-commissioning of several Magnox sites across the UK since 2014 but its contract will end next August. That's because the scope of work now needed at the 12 sites is ‘materially different in volume’ to the original specification.

EXPECTATIONS ALREADY LOWERED

Earlier in the year Babcock lowered its revenue forecast for the financial year 2020/21 by £100m but it assumed that it would be allowed to re-bid for the work and still get paid after next August.

However, the Nuclear Decommissioning Authority’s new procurement strategy for the Magnox sites is taking much longer than expected. This leaves Babcock with a potential revenue black hole of up to £250m over the next two years.


Issue Date: 21 Nov 2018