ii view: good momentum at Babcock’s nuclear and aviation operations

Five-month AGM trading update to 31 August

New chief executive Harry Hold said:

“Since becoming CEO, I have focused on maintaining disciplined execution, engagement with customers, shareholders and partners, investing in our people and sharpening the Group’s priorities for sustainable long-term growth.

“We have started FY27 with good momentum and operational delivery, supported by strong demand across our core defence and nuclear markets, while in the near term the UK government continues to confirm the details of the implementation of their Defence Investment Plan.

“In this era of global tension and the rapidly changing nature of warfare, our priorities are clear: deliver for our customers, strengthen programme performance, maintain capital allocation discipline and convert our strong market positions into long-term growth. I am excited about the opportunities ahead and I look forward to sharing more at our half year results in November.”

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ii round-up:

Babcock International Group (LSE:BAB) today maintained full-year and medium-term growth expectations, driven by exposure to both defence and nuclear engineering.

The critical and complex engineering services provider flagged good trading momentum for the first five months of the 2027 financial year to late August, with first-half results due to be announced on 19 November.

Shares in the FTSE 100 company rose 2% in UK trading having come into this latest news down by around a fifth so far in 2026. That’s similar to German defence contractor Rheinmetall AG (XETRA:RHM). The FTSE 100 index is up 7% year-to-date.

The London headquartered Babcock delivers its engineering services across the four areas of nuclear, marine, land and aviation. This includes the servicing of warships, nuclear submarines, jet fighters and even the building and decommissioning of civil nuclear energy plants.

Demand for nuclear and aviation services led trading momentum during the period. Nuclear activities accounted for most or 40% of sales over its last financial year, with aviation the least at 8%.

Operational events during the period included a six-month bridging agreement with the UK Ministry of Defence to enable the continuation of naval base and nuclear sub fleet support as a new long-term deal is agreed. It was also selected for an eight-year contract to support operational combat training for the French Air Force.

A £200 million share buyback announced in July is expected to complete by the end of the current 2027 financial year in late March. A £250 million six-year sterling bond launched during the period extends Babcock’s debt maturity and injects increased financial flexibility.

ii view:

Founded in 1891, Babcock today employs over 30,000 people. The group’s business model is focused on securing and executing long-term, high-value contracts for complex, integrated services and includes 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. The changing nature of warfare towards smaller unmanned drone type vessels potentially reduces big engineering opportunities going forward. The pending UK Budget could see spending priorities moved away from defence or those covered by Babcock, while a forecast dividend yield of around 1% compares to around 2% for major defence manufacturer BAE Systems (LSE:BA.).

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More favourably, heightened global geopolitical tensions and a reduced US appetite to defend Europe now support increased military spending across Europe. Exposure to nuclear energy, given no CO2 emissions under climate change concerns, is not to be ignored, and includes exposure to and potential growth in Small Modular Reactors (SMRs). Diversity of product and services and underlying customers exists, while Babcock is also exposed to developing autonomous, uncrewed, undersea platforms.

For now, and despite continuing risks, exposure to defence and nuclear technologies and a consensus analyst estimate of fair value above £14 per share, offer grounds for longer-term optimism.

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