Shares in defence and nuclear facilities management firm Babcock International (BAB) continued their recent rally with a gain of more than 10% to 348p after the group published stronger-than-expected results for the year to the end of March.

Today’s move takes the accumulated gains in the share price to almost 30% over the last fortnight and marks their highest level since March.

TRANSFORMING THE BUSINESS

Deciphering Babcock’s results isn’t straightforward as the group is part-way through a major restructuring under new chief executive David Lockwood and finance chief David Mellors, who together successfully turned round defence firm Cobham before selling it to private equity investors for £4 billion in 2020.

However, the firm has helpfully provided underlying numbers which give a better idea of the group’s performance in terms of the remaining businesses.

So, revenue for year was up 10% on an underlying basis to £4.4 billion while the contract backlog was up 7% on a similar basis, both better than thought.

Also, excluding £100 million of losses on the Type 31 programme due to unforeseen increases in build costs, underlying operating profit increased from £238 million to £278 million and underlying free cash flow was positive to the tune of £75 million against minus £191 million the previous year.

‘We've made excellent progress this year, with better-than-expected cash generation, margin expansion and double-digit revenue growth’, said Lockwood.

‘When we started our transformation, my first goal was to stabilise and strengthen the balance sheet and I'm delighted to say that work is complete. Babcock is now a higher-quality, lower-risk and more predictable business, with a clear focus on execution.’

With £2.8 billion of orders under contract as of 1 April and around £700 million of framework orders due to be delivered in the year to March 2024, the firm is ‘confident of another year of organic revenue growth and further underlying margin expansion’ and is reintroducing dividends.

WHAT DO ANALYSTS THINK?

George McWhirter at Berenberg expects Babcock shares to continue outperforming the market given revenue, profit and cash flow were ‘comfortably ahead of our estimates and consensus’ despite the Type 31 charge being at the top end of the firm’s guidance of £50 million to £100 million.

Meanwhile, the company’s short- and medium-term guidance and the resumption of the dividend send a positive signal about management’s confidence in the outlook, he adds.

Shore capital analyst Robin Speakman called the results ‘pleasing’ and described the decision to reintroduce the dividend ‘welcome news’.

Regarding the medium term, Speakman flagged Babcock’s target of mid-single digit revenue growth, an operating margin of at least 8%, against 6.6% last year, and an underlying operating cash conversion ratio of at least 80%, together with recent contract wins which should ‘drive the order book higher’.

LEARN MORE ABOUT BABCOCK

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