Alarm bells started ringing for investors when Babcock (BAB) announced that the Nuclear Decommissioning Authority (NDA) would be terminating its Magnox nuclear decommissioning contract in August 2019. This shortens the term of the work to five years, rather than the 14-year term originally agreed.
The group has a 65 per cent stake in the Cavendish Fluor Partnership (CFP), which operates the 12 sites covered by the contract. NDA chief executive David Peattie said the termination of the contract was "no reflection on CFP". The £6.1bn contract is being terminated because the volume of work required at the sites is materially higher than was specified by the government in its original tender. Babcock said this could put the contract at risk of a legal challenge.
The loss of this work will remove around £800m from the group's order book, which stands at £20bn. An annual decrease in revenue of around £100m - less than 2 per cent of turnover - is expected from the 2020-21 financial year, but the group expects to replace this in the normal course of business. Around £1bn will be removed from the £11bn bidding pipeline, but management hopes new opportunities will ultimately leave the pipeline more or less unchanged.
Shares in Babcock fell 4 per cent on the day of the announcement. Michael Donnelly, support services analyst at Panmure Gordon, said the drop in share price was understandable given the loss of a high-profile contract, but added that the expected growth in the pipeline was good news.
This was echoed by Shore Capital analyst Robin Speakman. He said much of the work was likely to come back to the group when it enters the pipeline again in around 18 months' time. "We're not going to be changing any of our numbers for this," he said.
Last year, the High Court ruled that the NDA had wrongly decided the outcome of the procurement process related to the Magnox contract. It settled with claimants Energy Solutions and Bechtel for a total £89m, plus costs. A spokesperson for the NDA said there would not be any further early termination of contracts, adding that the Magnox situation was due to an "absolutely unique set of circumstances".
