Buyers pick up Babcock at seven-year low

by Graeme Evans from interactive investor |

The share price has more than halved since 2016 and now sits at its lowest since 2011, but Graeme Evans finds a thriving fan club.

The task of shoring up investor confidence at defence group Babcock International became even more pressing today as shares in the mid-cap stock took another pounding in the wake of half-year results.

This latest sell-off follows the company's disclosure of one-off charges worth £120 million, alongside a warning that its 2019/20 performance will be impacted by a drop-off in nuclear decommissioning work.

While the underlying half-year performance was in line with hopes, shares in the heavily-shorted stock still tumbled 10% at one point to widen the gulf between its current value and the more optimistic positions of some in the City.

Liberum, for example, has Babcock as one of its top picks and said the shares were cheap on a price/earnings multiple of 6.8x. That's a 45% discount to the sector average of 12.3x, with the broker maintaining its 900p target price.

Analysts at Jefferies and Stifel are at 950p, although the latter admitted that management attempts to strengthen the business may take time to show results.

They said:

"Current valuation is compelling if our fundamental, positive, view of the group's market position and growth prospects is correct. However, we accept that the market’s low confidence in Babcock will not turn on a dime."

Source: TradingView one-minute chart (*) Past performance is not a guide to future performance

Shares last traded at 950p in early 2017, before a series of downgrades to consensus forecasts left the stock in its current predicament at its lowest point since 2011. It has become a target for speculators, particularly in light of the troubles and uncertainty facing the wider outsourcing sector, although the share price is up from a low of 521p on Wednesday to 569p mid-afternoon.

It's also had to deal with the fall-out from criticism of its performance contained in research put out by an anonymous group called Boatman Capital Research. Babcock said the claims that it had a poor relationship with the Ministry of Defence (MoD) were not true.

Babcock is the MoD's second biggest supplier, with the new HMS Queen Elizabeth aircraft carrier among recent high profile joint venture contracts.

It is currently working on the decommissioning of the UK's fleet of Magnox nuclear reactors, although the planned step down in revenues as the current contract comes to an end is now likely to be £250 million in 2019/20 rather than the previously expected £100 million.

Today's exceptional charges of £120 million stem from restructuring actions such as the tackling of overcapacity in its oil and gas helicopter services business. It is also exiting low-margin business, including through the previously announced closure of the Appledore shipyard in Devon.

Having added around £650 million of MoD work to its order book in the half-year, Babcock described the half year as solid and in line with expectations. However, it also conceded that conditions this year and in the near term were challenging in some markets.

CEO Archie Bethel added: "We are taking decisive actions to further strengthen the group, which will deliver benefits next year and beyond.” The company said its confidence in prospects and in its sustainable levels of cash generation was highlighted by a 3.6% increase in its interim dividend to 7.1p.

The challenge now will be to demonstrate that it can deliver long-term shareholder returns, having reportedly rejected any thoughts of breaking up of the business. The company dates back more than a century and has divisions covering the market sectors of marine, land, aviation and nuclear.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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