Is a fightback under way at Babcock? Like the Grand Old Duke of York, shares in the UK defence contractor marched all the way to the top of the hill last decade before marching all the way back down again.
Decent half-year results and reviving investor interest in defence stocks suggest the business may now be advancing again.
Babcock does some pointy end contracting of the kind larger rival BAE Systems specialises in. This includes building Type 31 frigates for the Royal Navy. But the company’s main focus has been training and facilities management, including running sites for the armed services.
Investor loss of faith in a broader cohort of UK outsourcers including Capita and Mitie is one reason Babcock shares trade at a quarter of their value eight years ago.
Boatman Capital has been another drag. In 2018, the shadowy short seller published critical claims including the suggestion that Babcock faced “potentially massive exceptional costs”. These allegations knocked spots off the market value, even though Babcock vigorously disputed them.
Underlying operating profits rose 5.5 per cent to £121.7mn in the six months to September 30 compared with a year before. This pointed to progress with the turnround led by David Lockwood, who became chief executive in 2020.
His overhaul plan has included a £1.7bn charge announced in April. Net debt at the end of September had fallen to 1.9 times ebitda from 2.8 times a year earlier, bringing Babcock within its target 1-2 times range.
The Ukraine war has signalled that nations still need equipping for conventional warfare. But Babcock has lagged behind peers in the sectoral recovery. The shares trade on a forward price/earnings ratio of less than nine, compared with more than the 14 times for BAE. Babcock has higher exposure to the weak UK economy and to lower-margin contracts.
Revenue and profits growth should continue, nevertheless. Expect the shares to move in parallel with better-known defence names. Lockwood’s main objective must be to spare the business further embarrassing retreats.
City Bulletin is a daily City of London briefing delivered directly to your inbox as the market opens. Click here to receive it five days a week.