Defence contractor Babcock International (BAB) just can’t seem to catch a break. Despite reporting full year results which were in line with its most recent latest guidance the share price has tanked today, falling more than 10% to 450p, close to a 10-year low.

That fact underlying revenues for the year to 31 March 2019 fell 3.8% to £6.16bn and operating profits, also on an underlying basis, are virtually flat is presumably influencing investors today.

That the performance is below the original guidance set out this time last year will hardly help the mood.

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Babcock provides critical support services to many of the world’s armed forces, including those of the UK, US, Australia and France. It also provides aerial emergency services in the US, Canada, France, Spain, Portugal and Norway.

In theory, this should give the company a fairly high degree of revenue visibility. In practice this is not always the case with the timing of typically large contracts always difficult to predict meaning final sign-off can face delays.

OPERATING PERFORMANCE

Underlying operating profits increased by just 0.7% to £588m last year although operating margins rose from 10.9% to 11.4%.

Combined with stronger free cash flow of £324m, up £74m on the previous year, and a reduction in debt and interest costs, the company has been able to raise its dividend, albeit by a fairly piddling 1.7% to 30p per share.

That chief executive officer (CEO) Archie Bethel is today talking down any improvement in the underlying trading environment for the current 12 months hardly instills confidence.

This is because a lower revenue run rates on several contracts, or what the company calls ‘step-downs’, plus weakness in short-cycle new business, according to the CEO.

LITTLE CHANGE TO GUIDANCE

Yet the forward guidance for revenues, operating profits and margins are bang in line with the company-compiled consensus, which should mean no changes to analysts’ forecasts.

Operational performance improvements, an increased order pipeline, lower debt and a refocused strategic direction that involves disposing of under-performing, non-core units appear to be getting little credit from investors today.

Babcock is also fighting off allegations by an anonymous firm, Boatman Capital Research, which claims that it needs to write down the value of its recently-acquired Defence Support Group subsidiary due to over-valuation of its contracts.

Since last October, Boatman has mounted a sustained campaign against Babcock’s management and its corporate structure which it calls ‘opaque, needlessly complex, needlessly expensive and prone to errors’.

During that time the shares have fallen from 700p to today’s low of 450p, a loss of nearly 36%, yet Babcock maintains that the allegations are inaccurate and misleading. It says it has been unable to engage with Boatman directly despite several attempts.


Issue Date: 22 May 2019