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Babcock International raised its profit targets and dividend on Wednesday, sending shares in the UK’s second-largest defence contractor up 13 per cent and cementing its position as the best performer on the FTSE 100 index this year.
The company, which among other things maintains the Royal Navy’s nuclear submarines and builds warships such as the Type 31 frigate, hailed a “new era for defence” as it also announced its first share buyback programme.
“This is a new era for defence,” said David Lockwood, Babcock chief executive, adding that there was an “increasing recognition of the need to invest in defence capability and energy security”.
Babcock shares were up 13 per cent by midday in London, giving it a market capitalisation of £5.8bn, and extending their gains for the year to 132 per cent.
Babcock said it was expecting average revenue growth in the mid-single digits and an operating margin of at least 9 per cent in the medium term, up from at least 8 per cent previously. The company also set out plans for a £200mn share buyback.
Lockwood said the 12-month period to the end of March had been a “pivotal year” and promised more to come. He added that there was “no complacency . . . As well as taking advantage of the strong market dynamics, you’ve still got to continue to improve performance.”
Babcock, which re-entered the blue-chip FTSE 100 index in March after a seven-year absence, is reaping the benefits of a five-year turnaround plan under Lockwood as well as an increase in defence spending by the UK and Nato allies. Prior to Lockwood’s arrival the company had faced operational issues and criticisms over its accounting.
The company’s home market accounted for 62 per cent of its revenues last year and Babcock expects to be among the key beneficiaries of the Labour government’s plan to spend more on defence and energy security.
Apart from maintaining and supporting Britain’s nuclear submarine fleet, Babcock is also one of the country’s civil nuclear contractors, including at Hinkley Point C, and expects to benefit from the government’s renewed support for nuclear power.
In the longer-term Babcock should also benefit from plans to expand the country’s nuclear attack submarine fleet from seven to as many as 12 through the trilateral Aukus pact with the US and Australia. Lockwood played down concerns that America’s review of the pact could undermine the company’s growth prospects, noting that its medium-term guidance was “underpinned by what we have today”.
In the near term, he said, “our focus is to support the existing [submarine] fleet, plus getting ready for Dreadnought [the successor to the UK’s nuclear deterrent fleet]”.
It was “not an unusual thing for a new administration to review its single largest collaborative defence programme”, added Lockwood.
Revenues and underlying operating profit in the 12 months to March surpassed the company’s expectations, while overall cash generation in the period also beat its forecast.
The group reported an 11 per cent increase in revenues to £4.8bn, with its nuclear and marine divisions driving growth. Operating profit surged 51 per cent to £364mn in the 12 months to the end of March, when its contract backlog stood at £10.4bn.
Based in London, Babcock said it planned to pay a final dividend of 4.5p per share, taking the total to 6.5p per share, up 30 per cent from the previous year.