ii view: Babcock charts a steady course

Defence operator Babcock is enjoying life at sea, but politics can always create waves. 

First-half trading update

• Trading is in line with management expectations
• FY underlying revenue to be around £4.9 billion
• FY underlying operating profit expected to be between £515 million to £535 million
• Performance will be weighted to the second half

ii round-up:

Established in 1891 as an engineering business, Babcock International (LSE:BAB) is today focused on the three markets of defence, emergency services and civil nuclear.

Employing over 35,000 people, Babcock delivers its services through four sectors. In marine, it provides life support of submarines, naval ships and infrastructure both in the UK and overseas. 

For nuclear, it offers complex engineering services in support of major decommissioning programmes and projects, new build programmes management and design and installation in the UK and, increasingly, abroad. On land, it supports specialist vehicle fleets including the British Army, the London Fire Brigade and the Met police. 

Finally, in aviation, it provides critical engineering services to defence and civil customers worldwide, including pilot training, equipment support, airbase management and transport services to and from offshore platforms.

For a round-up of this trading update, please click here. 

ii view:

Babcock's primary market remains UK defence. Along with maintaining and growing its UK business, management is also focused on expanding its international operations. 

Government defence spending both in the UK and overseas remains under review. Elevated borrowing levels in the wake of the financial crisis are set against geopolitical tensions, the rise of China and a Russian nation still struggling with the break-up of the former Soviet Union. 

For investors, recent contract wins and a rejected merger proposal from Serco earlier this year offer optimism. A prospective dividend yield in the region of 5% and a forward price/earnings (PE) ratio below both the three- and 10-year averages add further positivity. But government politics is never far away in the defence sector, and this has become ever more difficult to predict. 

Positives: 

• Previous merger/takeover proposal from Serco – rejected by Babcock
• Selected as preferred bidder for the Type 31 general-purpose frigate £1.25 billion programme
• Attractive dividend yield

Negatives:

• Defence is subject to potential government spending cuts
• A change of UK government could see a changes in defence spending priorities
• Civil nuclear market remains challenging

The average rating of stock market analysts:

Strong hold