Just as things appeared to be looking up for Babcock (BAB), the outsourcer was forced to cut its expectations for revenue growth this year after fresh spending delays hit its defence businesses. That's arisen due to a review of programme spend timings following the restructuring of the Ministry of Defence (MoD)'s Defence Equipment & Support organisation and the creation of the Submarine Delivery Agency.
Activity levels have slowed in the UK as the review takes place, leading underlying revenue growth guidance to be pared back to low single-digit levels, from low to mid single digits previously. The shares closed the day down 10 per cent following the announcement. Analyst consensus was for revenue growth of around 4 per cent, but this had been cut to 2 per cent at the time of writing.
Disappointment is to be expected following the group’s poor revenue growth in the year to March 2018, which was driven by a wider slowdown in UK defence spending and tough conditions in offshore oil and gas markets.
These latest delays affect the marine division, which accounted for 33 per cent of revenues at the last full year results. The land business has been similarly affected by sluggish government procurement in the UK.
Some of the concerns around the business models of outsourcers do not apply easily to Babcock. The main criticisms of many of its peers are that they compete on price for low-value blue-collar work, leading to low margins and at times aggressive accounting on the value of contracts. Babcock, however, focuses on more specialised work in areas such as nuclear decommissioning and defence, which is higher-margin and non-discretionary.
Over the past five years Babcock has often had low or zero exceptional costs or impairments; consistently high levels of either are often a key indicator of trouble. Likewise, the introduction of IFRS15, which tightens the regulation on revenue recognition and led to significant restatements for peer Capita (CPI), is not expected to have a material impact on Babcock.
