- Net debt falls to 2.1 times cash profit after Fraser Nash sale
- Asset disposals set to continue in second half
Defence contractor Babcock (BAB) is making progress in repairing its balance sheet, having sold off three businesses worth £400m in recent months.
Net debt reduced marginally to £1.35bn during the period, but will fall further once the proceeds of recent sales are accounted for. Debt excluding operating leases stood at £938m at the end of September, or 2.8 times Babcock’s cash profit. The £290m sale of engineering consultancy Fraser Nash to US industry giant KBR in October effectively reduces this figure to 2.1 times and the company's near-term target is to cut this below 2 times.
Restatements made earlier this year to last year’s figures to more accurately assess contract profitability – which includes a £761m prior-year goodwill write-down – make some comparisons meaningless, but the company said on an underlying basis its operating profit rose 36 per cent to £115m as its margin increased to 5.2 per cent, up from 4.1 per cent, as several business units faced fewer Covid-related disruptions.
Chief executive David Lockwood, who was appointed in June last year to lead a turnaround of the business, is clearly taking some difficult decisions.
For example, there was a £160m free cash outflow as Babcock stepped up efforts to repay creditors and the company increased capital expenditure by 51 per cent to £72.1m to fund new work.
He also has some laudable goals, such as simplifying Babcock’s structure and making environmental, social and governance (ESG) a key part of the company's strategy – although it is difficult to imagine some investors will ever consider a defence contractor to be an ‘ethical’ business.
But the task of fixing Babcock is far from over. The company is spending £40m on restructuring over the course of the year and more asset sales are likely in the second half. Until a clearer picture emerges of the business's long-term future, it's one to avoid. Sell.
Last IC View: Sell, 277p, 30 July, 2021
BABCOCK (BAB) | ||||
ORD PRICE: | 306p | MARKET VALUE: | £1.55bn | |
TOUCH: | 305.8-306.3p | 12-MONTH HIGH: | 388p | LOW: 197p |
DIVIDEND YIELD: | nil | PE RATIO: | na | |
NET ASSET VALUE: | 73p * | NET DEBT: | 376% |
Half-year to 30 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2020 ** | 2.05 | -812 | -164.8 | nil |
2021 | 2.22 | 58.8 | 10.3 | nil |
% change | +8 | -107 | - | - |
Ex-div: | - | |||
Payment: | - | |||
*Includes intangible assets of £1.1bn, or 225p a share. **Restated |