ii view: Babcock offers exposure to two popular sectors

Full-year results to 31 March

• Revenue up 10% to £4.83 billion
• Pre-tax profit up 52% to £329.1 million
• Adjusted profit margin of 7.5%, up from 5.4%
• Net debt down 14% to £373.3 million
• Final dividend of 4.5p per share
• Total dividend for the year up 30% to 6.5p per share
• New £200 million share buyback programme

Guidance:

• Now expects an adjusted profit margin of at least 9% over the medium term, up from a previous 8%

Chief Executive David Lockwood said: 

"This is a new era for defence. There is increasing recognition of the need to invest in defence capability and energy security, both to safeguard populations and to drive economic growth. 

“We look forward to continuing our track record of profitable growth, and to investing in the people and capabilities that will create value for all our stakeholders."

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ii round-up:

Critical and complex engineering services provider Babcock International Group (LSE:BAB) delivers it services across the four areas of Nuclear, Marine, Land and Aviation. 

The Nuclear division, generating 37.5% of sales over the past year, services navy nuclear submarines as well as managing the build, decommissioning and day-to-day activities of UK civil nuclear energy plants. 

The Marine business, accounting for 32.5% of sales, builds and services warships, along with building and supporting military communication systems and commercial gas engineering systems.

The Land division, generating 23% of sales, builds and services military vehicles such as those of the British Army, and provides commercial mining equipment support and training.

Finally, Aviation, accounting for 7% of sales, services military aircraft and provides training for the military, including the UK and French Air forces.  

For a round-up of these latest results announced on 25 June, please click here. 

ii view:

Started in 1891, Babcock today employs over 26,000 people. Key countries of operation include the UK, Australasia, Canada, France and South Africa. Babcock’s business model is focused on securing and executing long-term, high-value contracts for complex, integrated services. The value of the group’s contracted backlog as of late March stood at £10.4 billion, up from £10.3 billion the year before. 

For investors, ethical considerations given exposure to weapons and military training may deter some. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap. Costs for industry generally remain elevated, while a forward dividend yield of under 1% compares to nearer 2% for major defence manufacturer BAE Systems (LSE:BA.).

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To the upside, 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 overlooked. Diversity of product and services offered as well as underlying customers exists, while shareholder returns now include the group’s first ever share buyback programme. 

In all, and despite ongoing risks, exposure to high-demand sectors of defence and nuclear technology now leave Babcock worthy of its place in many diversified investor portfolios.  

Positives: 

• Order backlog supports revenues
• Diversity of sectors

Negatives:

• Subject to government spending plans 
• Elevated costs

The average rating of stock market analysts:

Buy