Babcock meets guidance but headwind worries persist

Babcock meets guidance but headwind worries persist

UK-based asset and infrastructure management firm Babcock International Group PLC (LON:BAB) stated that they had met their full-year guidance despite adverse conditions, and the firm was candid about the ongoing and future potential of headwinds weighing on revenues.

Performance and expectations

The company, which does business with notable partners such as the UK Ministry of Defence and Network Rail, met its guidance in despite a fall in pre-tax profit, which was attributed to the sell-off of assets and lower activity in the short cycle parts of its business – both of which weighed on performance.

Posting its recent round of results, the firm stated that pre-tax profit fell 39.9% to £235.2 million, and revenue dipped 4% on-year to £4.66 billion. However, underlying revenue was in line with its February guidance at £5.2 billion, with underlying operating profit making a modest increase of 0.7% and finishing at £588 million. The company’s combined order book and pipeline was stable at £31 billion.

Regarding its dour outlook, Babcock noted that for the year ending March 31st 2020, performance would be adversely affected by a ‘number of step downs’, which would decrease operating profit by £63 million and revnue by £410 million.

It also stated that it anticipated underlying revenue of approximately £4.9 billion, underlying operating profit of between £515 to £535 million and free cash flow in excess of £250 million. Further, it said that it expected to maintain its underlying margin at a range of 10.7% to 11%.

Babcock’s comments

“We have delivered a robust performance this year, operating profit is in line with our expectations, we have sustained our strong margins and we have improved our cash generation,” said Chief Executive Archie Bethel.

“More importantly for the delivery of our strategic goals and our future performance, we have sharpened our focus on our three key markets of defence, aerial emergency services and civil nuclear. We have strengthened our position in these areas with some important contract wins that partially offset the upcoming completion of the QEC contract and the loss of the Magnox contract and we have delivered further growth in our international businesses. In addition, we have exited low margin businesses outside of the three focus markets, which do not have synergy with the rest of the Group, and we have reshaped our oil and gas business.”

“As we begin the new financial year we do not expect the wider market environment to be any less challenging than we have experienced this past year.”

Portfolio considerations

The firm’s full-year dividend was 30p per share, an increase of 1.7% on-year. Following the update, the company’s share price dipped in morning trading, down 34.7p or 6.84% to 472.5 per share. There was some consensus on forecasts of Babcock stock, with Peel Hunt and JP Cazenove both downgrading their ratings from ‘Add’ to ‘Hold’ and ‘Overweight’ to ‘Neutral’ respectively. Further, Liberum Capital and Shore Capital both retained their ‘Buy’ stance.