ii view: Babcock in sweet spot of government demand

Full-year results to 31 March

• Revenue up 8% to £5.18 billion
• Operating profit down 19% to £293.3 million
• Net debt down 12% to £329 million
• Final dividend of 5p per share
• Total dividend for the year up 15% to 7.5p per share

Guidance:

• Around 70% of revenue for the year ahead already contracted
• Continues to expect adjusted profit margin of at least 9% over the medium term versus 8.2% this time

Chief Executive David Lockwood said:

"With our core capabilities aligned to our customers' evolving priorities, we are building a high-quality pipeline of long-term growth opportunities.

“Babcock is a more resilient business today, with clear momentum and strong visibility. I leave with confidence that the Group is well positioned for its next phase of delivery, growth and value creation."

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ii round-up:

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

The Nuclear division, generating 40% of sales over this latest financial 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 31% of sales, both builds and services warships, along with building and supporting military communication systems and commercial gas engineering systems.

The Land division, generating 21% of sales, builds and services military vehicles such as those of the British Army as well as providing commercial mining equipment support and training for staff of various customers.

Finally, Aviation, accounting for 8% of sales, services military aircraft as well as providing training for pilots including the UK and French Air forces.  

For a round-up of these latest results announced on 22 June, please click here.

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 assistance to building warships and servicing military vehicles for the British Army. Key countries of operation include the UK, Australasia, Canada, France and South Africa.

For investors, 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 within these latest results. The changing nature of warfare towards smaller unmanned drone-type vessels looks to reduce big engineering opportunities going forward, while a forecast dividend yield of around 1% compares to around 2% for major defence manufacturer BAE Systems (LSE:BA.).

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On the upside, heightened global geopolitical tensions and a reduced US appetite to defend Europe now support increased military spending across the Continent. Exposure to nuclear energy, given no CO2 emissions under climate change concerns, is not to be ignored, and includes exposure to and potential growth of small modular reactors (SMRs). Diversity of product and services offered as well as underlying customers exists, while the new chief executive from late July, Harry Holt, will likely look to rejuvenate group strategy.

In all, and despite ongoing risks, exposure to the in-demand sectors of defence and nuclear technology look to leave this specialist engineer of interest to longer-term investors.

Positives:

• Diversity of sectors
• Ongoing share buybacks

Negatives:

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

The average rating of stock market analysts:

Buy