Few companies can boast an order book that rivals a small country's GDP. But standing at a staggering £12bn, outsourcing giant Babcock's (BAB) certainly does. That order book ensures excellent visibility - indeed, the recent trading update confirmed that around 80 per cent of anticipated revenue for the current year is already contracted. And the order book does not look likely to tail off any time soon. At the full-year results, Babcock said that its bid pipeline - bids that can potentially become new contract wins - stands at a huge £15.5bn, up from £9.5bn a year earlier. That expansion comes as several big contracts move into the formal competitive process such as Magnox nuclear power station decommissioning and Ministry of Defence procurement work. The vast majority of the contracts would be sizable if secured, with almost three quarters of the pipeline comprising bids worth over £100m.
- Large order book providing visibility
- Huge bid pipeline
- Solid market position in attractive sectors
- Impressive cash generation
- Potential short-term margin pressure
- Execution risk on high profile contracts
The growth in the order book and bid pipeline are clear indicators of the health of Babcock’s end markets, as financial constraints push public and private sector clients towards outsourcing. Much of Babcock’s work is technically challenging and government-linked. This can be a PR disaster if the contract is mismanaged, as other companies in the support sector have found to their cost. But Babcock has so far lived up to its 'trusted to deliver' trademark, which should mean it's well placed for further work in these sensitive areas.
Babcock is the only company to have pre-qualified for all six of the new Ministry of Defence Next Generation Estate Contracts programmes, which engage private companies to manage sites ranging from barracks to sports pitches. The company also says it is engaged in 'positive' discussions with the Ministry of Defence about the new Maritime Support Delivery Framework to replace existing warship support modernisation contracts, which would inject over £2bn into the order book on signing. So there is plenty of scope for share price-boosting news in the near-term.
BABCOCK INTERNATIONAL (BAB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,189p | MARKET VALUE: | £4.3bn | |
| TOUCH: | 1,188p-1,189p | 12-MONTH HIGH: | 1,226p | LOW: 936p |
| FWD DIVIDEND YIELD: | 2.7% | FWD PE RATIO: | 16 | |
| NET ASSET VALUE: | 262p* | NET DEBT: | 57% | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 2.56 | 217 | 52.5 | 19.4 |
| 2012 | 2.85 | 274 | 61.5 | 22.7 |
| 2013 | 3.03 | 318 | 71.3 | 26.3 |
| 2014** | 3.28 | 307 | 68.5 | 28.9 |
| 2015** | 3.53 | 340 | 75.4 | 31.8 |
| % change | +7 | +11 | +10 | +10 |
Normal market size: 2,000 Matched bargain trading Beta: 0.38 *Includes intangible assets of £1.9bn, or 514p a share. **Cantor Fitzgerald estimates, adjusted PTP and EPS figures | ||||
One potential downside of being so busy is that there can be initial outlay on bidding for and initialising new contracts. The operating margin in the support services division dropped last year for this very reason. But the drop was hardly calamitous: to 9.7 per cent, down from 10.9 per cent. What's more, this was offset by margin improvement in the other divisions such as the marine and technology operation. Income from the Future Strategic Tanker Aircraft joint venture increased the defence and security division margin, and the international division was lifted by strong market conditions in the South African equipment and crane hire operations.
Net debt has historically been high as a result of the acquisition of VT in 2010, but strong cash generation means it is falling fast. In the latest financial year, Babcock met its aim once again of converting over 100 per cent of operating profit into cash, and net debt dropped £90m to £551m. So leverage ratios look far more comfortable now with net debt at 1.5 times cash profits from 1.8 times a year earlier.
