Babcock International is capturing the zeitgeist

With increasing military tensions firmly on the global agenda, Babcock International Group (LSE:BAB) has captured the zeitgeist in delivering another sparkling set of numbers.

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It may well be an unfortunate sign of the times, but the defence sector has been a major contributor to the FTSE100 rally which has seen the market set several record highs this year, notwithstanding the current jitters. That particular tide has lifted all boats and for Babcock, a rise of 125% in the share price this year alone saw the company promoted to the premier index in March.

For the six months ended 30 September, revenues rose by 5.4% to £2.54 billion, which was marginally ahead of estimates. Operating profit flew past expectations, rising by 27.5% to £234.3 million against an estimated £188 million. Other key metrics also showed substantial signs of improvement, with underlying operating margin spiking to 7.9% versus a previous 7%, and with free cash flow rising from £94.7 million to £140.6 million. Net debt also saw the benefit of the stronger performance, reducing to £351.1 million from £385.6 million.

Unsurprisingly, by division the progress was also healthy, with the only blot on the landscape being in Land, as previously flagged. Revenues dipped by 10% given lower Rail revenues, although operating margin improved. Any such shortfall was more than offset by the other units, however.

The largest division, Nuclear, represents 39% of overall sales and saw revenue growth of 14%, driven in part by a strong showing from submarine support, where the outlook remains positive. Marine, at 32% of sales, lifted revenues by 6% after some record order wins, while Aviation at 8% of sales saw revenue growth of 26% following the signing of some major new international contracts.

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Indeed, the backdrop is set fair. Around 62% of group revenue is derived from UK defence, where the latest government announcement has pledged to spend of 5% of GDP by 2035, leaving the door ajar for Babcock to make further progress. Of particular interest is the likely concentration of spend on the civil and defence nuclear budget. Nuclear should be a particular beneficiary, with its expertise in submarines also reaching over to its Marine business.

As such, Babcock is maintaining its previous guidance, which was previously recorded as expecting revenues of £5.1 billion for the year against a previous £4.83 billion and underlying profit of £401 million versus £363.9 million in the corresponding period. The group is on track to achieve its target of 8% operating margin, which it expects should rise to 9% thereafter

The more immediate outlook also seems assured. The contract backlog now stands at £9.9 billion, increasing earnings visibility, while the group is in collaboration with any number of overseas companies which extends its reach. In addition, Babcock continues to look closely at complementary bolt-on acquisitions. Even in the absence of acquisitions, the cash generation has enabled ongoing investment in the business, where rapidly evolving technology remains a key factor, and for the introduction of a £200 million share buyback programme which is ongoing.

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Expectations for prospects have been on a march, which has weighed on the opening reaction to the update, but for the most part the likes of Babcock have lived up to their billing. The shares have risen by 118% over the last year, as compared to a gain of 16.9% for the wider FTSE100, and by 291% over the last three years.

It is perhaps therefore unsurprising to see some profit taking at the open, exacerbated by a weak wider market. However, despite what is likely to be a temporary setback, appetite for the group remains undiminished and the market consensus of the shares as a strong buy is unlikely to waver any time soon.