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Babcock shrugs off outsourcing worries to deliver record profits

Engineering outsourcer Babcock International has allayed concerns it could be the next Carillion by hitting its financial targets.
The company, which counts the Ministry of Defence as its biggest customer, had seen its share price fall until recently as speculation grew that it could face the same troubles as outsourcers such as Carillion, Capita and Mitie.
Worries about the MoD’s ?20bn funding gap, regulatory moves to cut profits allowed on defence deals and accounting changes which could mean the value of long-term contracts are wound back, also increased fears.
Babcock shrugs off outsourcing worries to deliver record profits

Babcock services the Navy's submarine fleet

Credit:
PO Tam McDonald /ROyal Navy
The concerns saw speculators pile into Babcock shares, betting the stock would fall. At the peak in April, 7.7pc of Babcock’s shares were controlled by short-sellers, a level which has since dropped to 6pc.
However, Babcock, whose shares are listed on the FTSE 250, defied the worries in its annual results for the year to the end of March. Underlying revenue - which includes proceeds from the company's joint ventures - rose 2.8pc to ?5.36bn and pre-tax profit was 3.6pc stronger at ?512.5m.
Shares in Babcock reacted by jumping 6pc in early trading.
Babcock
Archie Bethel, chief executive, called it “a year of progress on all fronts” with record profits, and emphasised that Babcock was a “specialist engineering company”.
He made the point that troubled outsourcers are services companies and Babcock is different to them, with the market wrongly valuing it solely as an outsourcer.
"We are an engineering services company with big assets like dockyards, factories and assembly yards," Mr Bethel said. "Outsourcers are the kind of companies that take over wokforces, that's the big difference. We are much more like a manufacturer with a big capital base."
"We've been around for 127 years and it's only in the last 10 years people have started calling us an outsourcer, not an engineer.
Analysts were reassured by the performance, which didn't include any major exceptional costs or revaluing of contracts.
Liberum's Joe Brent described the results as containing “no new funnies”. He said he “took some comfort” that the new accounting rules did not lead to changes in contract revenue or profit recognition.
Accounting changes were behind the troubles of two major outsourcers, Mr Brent added.
“The two companies that were likely to be most affected by [accounting changes] were Carillion, which did not end well, and Mitie, where the new regime has cleaned out the stable," he said.
Babcock shrugs off outsourcing worries to deliver record profits

Babcock is part of the consortium which is building Britain's new aircraft carriers

Credit:
Rob Arnold/LNP
Babcock's major contracts include servicing the Navy’s fleet, building the new aircraft carriers, looking after RAF bases and maintaining the Army’s kit. It also runs training for the military - and recently won a deal to train French pilots.
Other areas the company has contracts in include decommissioning nuclear reactors, running helicopter services around the world and airborne firefighting services.
Babcock’s order book of ?18bn was ?1bn lower than at the same point last year, but Mr Bethel said the pipeline of contracts stood at ?31bn, ?1bn higher than it was in 2017.
Contracts in the bidding process included the Type 31e "budget" frigates for the Royal Navy, maintenance for Canada's navy, providing a private air force for RAF pilots to train against, a major rail maintenance plan in the UK, and more work on the Hinkley Point nuclear power station.
The shareholder dividend increased by 4.8pc to 29.5p.
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