ii view: Babcock confident despite warship issue

Full-year trading update to 31 March

• Revenue up 9% to £5.27 billion
• Operating profit down 19% to £293 million
• Net debt down 12% to £329 million
• New £200 million share buyback programme

Guidance:

• Around 70% of revenue already contracted for the year ahead 
• Continues to expect adjusted profit margin of at least 9% over the medium term

ii round-up:

Babcock International Group detailed an exceptional charge that affected annual profit, although the engineer remains confident about the outlook, supported by its role in the nuclear small modular reactors (SMR).

Profits for the full year to late March are expected to come in at £293 million, down from the prior year’s £363 million. A £140 million charge relates to the redesign of the UK navy’s Type 31 frigates mid-build, and the subsequent rework. Profits excluding the charge rose to £433 million.

Shares in the FTSE 100 company had risen 3% in early UK trading having come into this latest news down by close to a fifth so far in 2026. However, gains had been wiped out by lunchtime. Shares in rival engineer and maker of defence equipment BAE Systems are up around a tenth this year , while the FTSE 100 index is up almost 4% year-to-date.

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Babcock’s nuclear division services nuclear submarines as well as providing building and decommissioning services to the civil nuclear power industry.

A forecast adjusted profit margin of at least 9% over the medium term compares with 8.2% over this latest financial year when the exceptional charge is excluded.

Just after the March year-end, Babcock’s Cavendish nuclear business via a joint venture won business to deploy SMR reactor technology for the UK's first project in North Wales. The contract is worth up to £300 million over 14 years and now supports medium-term ambitions.

Already contracted work covering 70% of expected revenues for the year ahead includes new equipment and services across its defence focused divisions of Marine, Land and Aviation.

Aviation, offering services such as military pilot training, led revenue growth over this latest year with sales up 34% to £431 million. Nuclear related revenues rose 14% to just over £2 billion.

Underlying free cashflow of £262 million was up from £153 million the year before, supporting a 12% reduction in group net debt to £329 million.

A new £200 million share buyback programme replaces a now completed buyback of the same size. Full-year results are expected late June.  

ii view:

Babcock’s business model is focused on securing and executing long-term, high-value contracts for complex, integrated services. Group services and products range from nuclear related assistance to building war ships and servicing military vehicles for the British Army. Key countries of operation include the UK, Australasia, Canada, France and South Africa.

Ethical considerations given exposure to weapons and military training may deter some investors. Changing government requirements can impact operations and raise costs as seen with the group’s Type 31 frigate contract. A forecast price/earnings (PE) ratio in line with the three-year average may suggest the shares are not obviously cheap, while an prospective dividend yield of under 1% compares to around 2% for major defence manufacturer BAE Systems.

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More favourably, heightened global geopolitical tensions continue to support defence spending. Exposure to nuclear energy, given no CO2 emissions under climate change concerns, is not to be ignored and includes potential growth in SMRs. Diversity of product and services offered as well as underlying customers exists, while a pending change of the chief executive could rejuvenate group strategy.

On balance, risks remain and the shares aren't cheap after a period of outperformance. Speculation that an end to the war in Ukraine may be in sight has also knocked defence stocks. However, defence and nuclear technology remain popular sectors and mean investors might still consider Babcock for a place in diversified portfolios.  

Positives:

• Diversity of sectors
• Relatively new share buyback programme

Negatives:

• Subject to government spending plans
• Required public trust in nuclear energy

The average rating of stock market analysts:

Buy