Babcock International (BAB) shares slipped as the company warned it may have to book a loss of between £50mn-£100mn on a contract to build five frigates for the Ministry of Defence.
Babcock won the Type 31 contract in 2019 to deliver the vessels at an average production cost of £250mn per ship, the first of which is due to be delivered in December. The company has recognised £600mn in revenue from the programme so far but hasn’t made a profit, citing “additional forecast costs resulting from certain macroeconomic conditions that were not foreseen” when work began.
It has been unable to reach an agreement with the MoD about accounting for these and said a dispute resolution process had begun. If it can’t reach agreement by the time its year-end accounts are published, it will have to book the loss to cover the remainder of the contract. However, if a settlement is subsequently agreed, or if it secures an award through arbitration, any loss booked could be reversed “in part or in full”.
Otherwise, underlying profitability for the year ending in March was in line with expectations, the company said, with asset disposals and cash generation allowing it to cut net debt (excluding leases) to £350mn by year-end, from £557mn in the prior year.
Although the improved cash position “is pleasing in the context of performance over the past few years", the provision on the frigates contract fully cancels this out, Shore Capital analyst Robin Speakman said in a note.
Changing the terms of the contract could also reopen a bidding process with competitors who initially pitched to build the frigates, he added. “In our view, further costs associated with the contract can’t be ruled out.”
Babcock shares slipped by 2 per cent in early trading and trade at around 7.5-times FactSet consensus forecast earnings.
