Babcock hindered by helicopter issues

The overhaul of the business – and resultant exceptionals – was precipitated by a fall-away in demand for the EC225/Super Puma helicopters in the North Sea, following a fatal crash in Norway in 2016, leading to onerous lease charges, sales and redeployments, which meant that the group was unable to benefit from the accompanying retracement in crude prices.

Babcock’s full-year returns contain no shortage of caveats and underlying measures of profitability, but a blunt 256 basis point reduction in the gross margin underlines the challenges faced by the group. The top-line contraction was partly due to declining payments for the Queen Elizabeth-class warships contract as it approaches completion, along with exits from non-core businesses.

It’s hardly surprising, however, that the group’s financials have been negatively affected by the ongoing metamorphosis. Surplus capacity is being pared back across the group, with the marine business leaner through its exit from the Appledore shipyard following the completion of work on Irish offshore patrol vessels. Babcock also reduced surplus capacity in its rail business ahead of its bid for the new CP6 (Network Rail) contract.

The combined order book and pipeline was stable at £31bn, although it’s a mixed outlook. The civil nuclear space holds long-term promise as old facilities are decommissioned and new ones put online, but near-term performance will be hit by project delays and the cessation of the Magnox decommissioning contract in August 2019. But the group was able to point to new 10-year rail contracts, the Dounreay Materials Test Reactor dismantling and new contract wins from the Royal Navy.

Bloomberg consensus forecasts point to adjusted pre-tax profit of £489m for the March 2020 year-end, with related earnings of 78.4p a share, rising to £510m and 80.7p in FY2021.