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Babcock flags revenue decline

The outsourcer turned aerospace specialist has unveiled yet more charges
February 27, 2019

Babcock (BAB) has warned that revenues for the year to March 2019 will decline following weaker trading in the rail division and has unveiled two new exceptional costs that will further suppress earnings.

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Underlying revenues are now expected to be around £5.2bn for the year, down from £5.36bn in 2018, defying expectations that sales would hold steady for the year. Demand from the rail industry has weakened as the sector moves into its new regulatory period, while delays in the South African power business have also hindered revenue growth. 

To comply with European operating requirements following the UK’s departure from the EU, Babcock has been forced to restructure its aerial emergency services business to ensure its 400 aircraft in operation around the continent are still covered by the European Union Aviation Safety Agency. As a result, it will face a £10m one-off tax cost, followed by £10m in additional annual costs to operate the new structure.

What’s more, a landmark court decision in the UK late last year ruled companies must provide equal guaranteed minimum pension benefits to men and women, forcing Babcock to adjust its pension liabilities upwards by £30m.

These charges are relatively small in the context of the group’s multibillion-pound revenues, but investors have endured a steady slew of bad news about Babcock in recent months. In July last year, management flagged spending delays to UK defence programmes, while the group was heavily criticised in a note from an as-yet-unknown research firm, Boatman Capital Research, and 6.6 per cent of its share capital is still being shorted.

As a provider of outsourced public services to the UK government – albeit very specialised ones – Babcock has frequently been grouped with more general outsourcers such as Serco (SRP), Interserve (IRV) and Carillion. Given the poor performance of the sector in recent years, management has been keen to highlight the distance between the work it does and that carried out by many of the other outsourcers, an endeavour not helped by its classification as a “business support services” company. It has now been made official. The group announced its sector classification has now been changed to “aerospace and defence” on the FTSE.