Shares in engineering and defence company Babcock (BAB) climbed as much as 34% to 325p after the firm announced it would streamline its business and in the process take £1.7 billion of non-cash writedowns, but doesn’t need to tap shareholders for cash.
NO CAPITAL RAISE
Considering the shares were marked down sharply last Friday on press talk of writedowns reaching £700 million, today’s spike may come as a surprise to investors.
However, the move reflects both the fact the company isn’t issuing new shares to pay for the impairment charge, and it is heavily shorted which means the further the price rises the bigger the scramble by hedge funds to buy back shares to cover their short positions.
According to the shorttracker.co.uk website, 2.4% of Babcock’s capital has been shorted so far this year, which equates to just over 12 million shares compared with an average daily volume of between two and three million shares.
PROFIT REBASE
The company said that after a thorough review of contracts and its balance sheet, it needed to put aside £1.7 billion for potential losses as well as revising its forecasts for future profits as it continued to assess the business. The firm also said it was ‘cautious about progress in profitability‘ next year as 2022 would be ‘a year of transition’.
It also said its review ‘is expected to result in an ongoing reduction in group underlying operating profit of approximately £30 million each year’.
Putting that in perspective, pre-pandemic operating profits were in the region of £580 million per year so the reduction isn’t too severe.
Going forward, the company will focus on international aerospace, defence and security, while keeping its naval business ‘and providing value add services across the UK, France, Canada, Australia and South Africa’.
It has already identified certain non-core businesses which it has earmarked for sale and expects to raise proceeds of around £400 million over the next 12 months.
