As UK-based outsourcers spent much of the last 12 months embroiled in seemingly endless crises, Babcock (BAB) has continued plugging along. The group, which provides bespoke engineering services, saw its share price weighed down by negative sector-wide sentiment, and worries that looming Ministry of Defence (MoD) budget shortfalls could constrict trading activity. (The MoD remains its largest single customer.) Fears that Babcock was going down the same path as Capita (CPI) or, heaven forbid, Carillion, intensified in February when it revealed that it would miss forecast revenues for the year. But as these solid set of full-year figures demonstrate, the group is made of sterner stuff. Although the misgivings weren't entirely misplaced, it's worth noting that some of the bears have backed off, with the percentage of short positions falling back slightly since March.
The group’s trading performance was bolstered by sales growth in the land, aviation and nuclear divisions, which also offset a drop back in Marine. The nuclear business appears to have shrugged off the decision to cut short the Magnox nuclear decommissioning contract in August 2019. Management said the loss of revenues from the contract could be mitigated by work undertaken with energy giant EDF and new opportunities coming from the UK Atomic Weapons Establishment.
Babcock's balance sheet, like its benighted sector peers, may be stuffed to the gills with intangible assets and receivables, but it's debt profile is actually improving. Net debt declined to 1.6 times cash profits, from 1.8 times at FY2017, and is forecast to contract to a multiple of 1.4 by next March. And while some peers are expecting to take a hit from the introduction of IFRS 15 – an accounting standard governing revenue recognition on long-term contracts – the group isn't expecting any adverse impact from adoption of the measure.
Analyst Panmure Gordon raised its target price to 820p following the announcement, and is forecasting adjusted pre tax profit of £522m in the year to March 2019, giving EPS of 83.4p (up from £512.5m and 83p in 2018).
| BABCOCK (BAB) | ||||
| ORD PRICE: | 795p | MARKET VALUE: | £4.02bn | |
| TOUCH: | 794.2-795.4p | 12-MONTH HIGH: | 1,030p | LOW: 604p |
| DIVIDEND YIELD: | 3.7% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 572p* | NET DEBT: | 38% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2014 | 3.55 | 219 | 50.1 | 21.4 |
| 2015 | 4.00 | 313 | 52.9 | 23.6 |
| 2016 | 4.16 | 330 | 57.0 | 25.8 |
| 2017 | 4.55 | 362 | 61.8 | 28.2 |
| 2018 | 4.66 | 391 | 66.6 | 29.5 |
| % change | +3 | +8 | +8 | +5 |
| Ex-div: | 28 Jun | |||
| Payment: | 10 Aug | |||
| *Includes intangible assets of £3.13bn, or 619p a share | ||||
