Shares in defence services group Babcock International (BAB) jumped as much as 8.5% to 332p, topping the FTSE 250 leader board, after the firm announced it had secured the sale of Frazer-Nash Consultancy to US engineering firm KBR for £293 million.
The business, acquired by Babcock in 2007, forms part of the Marine division providing cyber-security, robotics, security and software services to governments, infrastructure firms and the defence sector.
POSITIVE PROGRESS
In the year to March 2021 FNC delivered revenues of £100.5 million, almost flat on the previous year, and pre-tax profits of £13.5 million against £17.1 million the year before.
The sale takes Babcock almost three quarters of the way towards its 12-month target of £400 million of asset sales and will be a welcome relief for shareholders, who have seen their shares yo-yo since the company published its full year results and turnaround plan a fortnight ago.
Alongside disposals, Babcock is implementing a new operating model which it hopes will produce annual cost savings of around £40 million and sharpening its focus on cash generation.
COSTLY EXERCISE
The turnaround hasn’t come cheap, however. Last month Babcock revealed it would take a one-off charge of £2 billion consisting of £1.35 billion of impairments on goodwill and acquired intangible assets, £464 million for lower forecasts for contract profitability in 2021, £171 million for ‘the cumulative correction of prior period errors’ and £60 million for a change in accounting policy.
It also said free cash flow would be impacted by £130 million of increased pension fund provisions and £70 million of exceptional costs, including £20 million for a fine from the Italian government.
Going forward, the firm flagged it would see a recurring downward ‘adjustment’ to underlying operating profit of £25 million per year, which equates to just under 7% of profits for the year to March 2020.
CAUTIOUS OUTLOOK
While the firm said it was ‘confident about our prospects in the markets we serve’, it admitted that although activity levels had recovered this year the additional costs of operating in a Covid-secure way hadn’t disappeared and it didn’t anticipate a material improvement in profitability from the easing of restrictions.
Analyst Robin Speakman at Shore Capital called the FNC disposal 'a positive step towards reducing the group’s net debt', but added ‘challenges remain for Babcock to overcome in the medium term’.
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