Babcock delivers solid earnings growth

There’s plenty of earnings visibility, too, with 92 per cent of revenue in place for the year to March 2018 and 59 per cent for the following year. And the combined order book and bid pipeline remained stable at £30.7bn. There have been some impressive new contract wins, notably a £360m deal to become marine systems support partner for the UK navy’s new aircraft carriers and Type 45 Destroyers, and an air ambulance contract in Norway worth up to £500m.

Underlying revenue including joint ventures rose by 6 per cent to £323m for nuclear work and, although margins were slightly lower at 9 per cent, underlying operating profits were ahead by 2.1 per cent at £29m. Much of the increased revenue reflected more work undertaken at the Magnox and Dounreay decommissioning joint ventures.

On the aviation side, work began on the French Air Force training contract, whereby aircraft and other assets are acquired for leasing to the French air force. However, changes in the programme schedule have increased working capital requirements by £44m, although this is expected to be reversed in 2018-19 when the leases are signed.

Cash conversion remained strong at 106 per cent of cash profits, and even after capital expenditure it was still an impressive 78 per cent. Net debt fell from 2.0 times cash profits to 1.9, and is expected to drop to 1.7 by March 2018. And, while underlying operating margins edged down from 10.8 per cent to 10.5 per cent, this trend is expected to reverse because of fewer low-margin contracts and no repeat of a £7.5m provision charge related to contract and reorganisation costs.

Analysts at Panmure Gordon are forecasting adjusted pre-tax profit of £513m and EPS of 83p for the year to March 2018 (from £495m and 80.1p in 2017).