- Majority of full year sales already signed
- Underlying operating profits up 10%
- Valuation ‘too cheap’ says analyst
Defence and nuclear engineering group Babcock International (BAB) surprised the market with an upbeat six-month trading update and a positive outlook for the full year.
The shares topped the mid-cap leader-board surging 8% to 313p, their best level since mid-September.
WHY ARE THE SHARES RALLYING?
Group revenues for the first half to September were more or less flat at £2.14 billion while operating profits were marginally lower at £72.8 million against £75.4 million last year.
Underlying operating profits were up 10% to £121.7 million, with the headline figure partly impacted by a £28.7 million non-cash adjustment for currency derivative contracts.
However, investors were keen to focus on the positives with the order backlog hitting £9.9 billion and 90% of full-year revenues already contracted.
Thanks to its strong top-line visibility, and despite the ongoing challenge of wage inflation, the firm maintained its forecasts for the full year.
‘Babcock has made strong progress over the past six months’, said chief executive David Lockwood.
‘We have enhanced our operational efficiency, cash flow performance and financial resilience, whilst improving delivery for our customers. Whilst there is still more to be done, the significant contracts won this year underpin our confidence in our potential to deliver sustained growth and capture margin upside over the medium term.’
EXPERT VIEWS
Analysts at Berenberg noted the results were ahead of consensus with free cash flow ‘particularly strong and ahead of previous guidance’, indicating good progress on the firm’s turnaround strategy.
They added: ‘We expect low- to mid-single-digit upgrades to consensus estimates and expect the shares to outperform’.
Joe Brent at Liberum suggested Babcock was benefitting short-term from the situation in Ukraine, which has highlighted the need for greater defence spending, although the lack of an increase in spending plans in the Autumn Statement was a slight disappointment.
On balance, however, the shares’ valuation is ‘too cheap given the progress on fixing the business and the balance sheet’, concluded Brent.
