ii view: Babcock shares dive, dive, dive

Further uncertainty is bad news for this defence engineer and builder of warships and submarines.

Nine-month trading to 31 December

• Adjusted revenue down 3% to £3.39 billion
• Adjusted operating profit down 34% to £202 million
• Order book of £16.8 billion down from £17.6 billion as of 31 March 2020

Chief executive David Lockwood said:

"While trading in the third quarter has continued to reflect the challenges of the first half and there remain a number of near-term uncertainties, the fundamental strengths of the Group and the opportunities ahead give us confidence for future years and I look forward to reporting back at the full year results".

ii round-up:

Engineering and defence company Babcock International (LSE:BAB) today added a review of contract profitability to ongoing trading weakness and operational challenges under the global pandemic. 

The chief executive has, appointed in September, begun a detailed review of Babcock’s balance sheet and contract profitability, with early indications suggesting that there may be negative impacts on the balance sheet and/or its income statement for current and/or future years.

Babcock shares tumbled by around a fifth in early UK trading. Leaving them down by more than 60% over the last year alone. Shares of BAE Systems (LSE:BA.)are down by less than 20% over the last year, while shares of QinetiQ (LSE:QQ.) are down under 10%.

The new review now accompanies another previously launched review of the company’s strategic priorities. Its assessments include group cash delivery, being a strategic partner to the UK government, international growth and driving company innovation. Findings are due to be outlined in upcoming full-year results.

Adjusted operating profit for the nine months to end of December was down by just over a third to £202 million. Again, hit by operational challenges under Covid-19, weakness in civil aviation and the government’s previous insourcing of nuclear power projects. Virus challenges and inefficiencies have arisen due to the often-close working proximity of its staff on ships and submarines for example.

Nine-month profits of £202 million leaves a lot to be achieved in the remaining quarter of Babcock's financial year, given current full-year estimates of £350 million. This implies cuts to profit forecasts. 

Babcock again offered no guidance or financial estimates given both ongoing Covid uncertainty and the new review of contract profitability.  Full-year results to the end of March should be announced in May. 

ii view:

The critical and complex engineering services provider delivers it services across the four areas of marine, land, aviation and nuclear. Along with servicing marine warships and nuclear submarines, it also supports land vehicle fleets such as those of the British army and Met police. Its aviation business includes the now spend thrifty oil and gas industry which has been busy reducing services to offshore facilities.  

For investors, early and firm action by the relatively new CEO suggests strong leadership, while a previously rejected merger proposal from Serco (LSE:SRP) should also not be forgotten. But a review of contract profitability adds further near-term uncertainty to the outlook clouded by Covid. A currently suspended dividend payment adds shareholder concerns. And the link between globally stretched pandemic-hit government finances and defence spending should also not be overlooked. In all, and given the degree of outlook uncertainty, it may pay to monitor progress before gaining exposure here.

Positives: 

• Strategic review ongoing
• Previous merger/takeover proposal from Serco

Negatives:

• A review of contract profitability launched
• High Covid operational challenges

The average rating of stock market analysts:

Strong hold