Engineering outsourcing company Babcock International (BAB) is up 4.6% to 837p on releasing a trading statement. Its content suggests the company is on target to grow its revenues with improving visibility.

This seems to have buoyed investors who have had to watch Babcock’s decline over the last three years, with Brexit causing more uncertainty for the company recently.

The statement suggests that the company’s four main divisions are performing well. Its marine sector was given a boost earlier this year when it won a £360m contract to be the technical partner for the Royal Navy’s new aircraft carriers HMS Queen Elizabeth and HMS Prince of Wales.

Babcock International Group  BAB    Share Price   Shares Magazine

Geopolitical friction

Given the tensions between North Korea and the US, it’s not surprising that South Korea is looking to beef up its military. Babcock has been awarded a seven year contract to design and provide the Asian state’s Jangbogo III submarine’s weapons launch systems.

The company has also begun work on a €500m military air training contract for the French Air Force.

Even its nuclear division, given a bit of whack earlier this year after its Magnox nuclear power station decommissioning contract was terminated, seems back on line.

The company is participating in the tender process for the Sellafield decommissioning and is designing the Wylfa Newydd radioactive waste facility for Japan’s JGC Corporation.

When the company says that the order book and bid pipeline ‘have remained stable’ and it can ‘continue to provide confidence in our ability to grow revenue as expected over the medium term’ this seems reasonable given the examples.

Is now the time?

Given the uncertainty for support service companies following first Brexit then the hung parliament result, many investors were rightly sceptical of investing as contracts may not be upheld.

Joe Brent, analyst at Liberum, gives Babcock a buy rating, as does Panmure Gordon. Brent gives the company a target price of £11.00, implying a 31.4% upside.

The company is trading on 9.4 times 2018’s 88.8p per share of earnings, based on Liberum’s forecasts. The stock is also trading on a current 3.5% dividend yield for 2018.

Brent says ‘Babcock’s share price has performed poorly since the UK referendum on EU membership on 23 June last year. The business should deliver mid-single digit revenue growth in 2018, which makes the business too cheap to ignore,’ which is the basis of his buy recommendation. Brexit worries remain but perhaps this company is capable of weathering the storm.

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Issue Date: 20 Sep 2017