ii view: Babcock scuttles the dividend

Shares in this engineer and defence contractor have sunk this year. Now the dividend is torpedoed.

Full-year results to 31 March 2020

• Adjusted revenue down 5.6% to £4.87 billion
• Adjusted operating profit down 11% to £524 million
• Exceptional charge of £503 million
• Statutory loss of £165 million
• Final dividend decision deferred 

Chief executive Archie Bethel said:

"We end a busy year in a strong position to deal with the current coronavirus uncertainty. We saw strong performances across our Marine, Nuclear and Land sectors and have taken action to address weaknesses in Aviation, including writing down goodwill to reflect our updated expectations of the oil and gas market. The early impact of the global Covid-19 pandemic had a limited impact on the Group in the last financial year but is creating uncertainty as we head into this new financial year.

"Looking back over last year, we made solid progress in driving our strategy forward. We achieved good revenue growth across our defence businesses and won significant opportunities.

"We enter the new financial year facing uncertain times. Despite this uncertainty, the group's strong liquidity position, robust business model, record order book and pipeline and focus on critical services gives us confidence that we will deliver for all our stakeholders in the current year."

ii round-up:

Engineering company Babcock International (LSE:BAB) today pulled the payment of its final dividend, deferring a decision on its payment until the impact of the corona crisis becomes clearer. 

Like many other companies, it also offered no financial estimates or guidance for the year ahead given the pandemic. 

Babcock shares fell by more than 4% in UK afternoon trading having fallen by nearly 40% year-to-date. For comparison, shares of BAE Systems (LSE:BA.) and Rolls-Royce (LSE:RR.) are down by 7% and 52% in 2020 respectively. 

The critical and complex engineering services provider also took a £503 million exceptional charge which included a write-down in the value of its aviation business – pushing it into a loss for the year to the end of March. 

The aviation division has the highly competitive oil & gas industry among its customers. Babcock plays a part in transporting workers to and from offshore facilities.  

All of its major sites have remained open during the pandemic, given that its customers include the Ministry of Defence and emergency services. 

Contract wins over the year included a Type 31 naval frigate programme, Metropolitan Police training and submarine work for both the US and Australian navies.  

Its combined order book and pipeline reached a record. The order climbed by £5.3 billion to £17.6 billion, while it added £3 billion to its pipeline of work to reach £17 billion.

ii view:

Employing over 35,000 people, Babcock’s primary market remains UK defence. Along with maintaining and growing its UK business, management is also focused on expanding its international operations. Marine and Land each account for around one-third of group sales, Aviation a fifth and the balance Nuclear. 

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 and the rise of China . Now, Covid-19 is adding yet more government borrowings. 

For investors, a £3 billion increase in its pipeline of work compared to this time last year and a previously tabled, but rejected, merger proposal from Serco (LSE:SRP) offer optimism. But the loss of the final dividend, at least for now, is a blow, while the election of a new UK government in late 2019 saw yet another defence spending review promised. For now, and despite the undemanding valuation, investors may choose to wait for signs of some management confidence in the outlook before taking action. 

Positives: 

• Previous merger/takeover proposal from Serco – rejected by Babcock
• Record combined order book and pipeline

Negatives:

• Final dividend payment pulled
• Cuts to defence spending often follow growing government debt 

The average rating of stock market analysts:

Buy