"Market fears over Babcock are overdone, says Numis
Shares in engineering support services company Babcock (BAB) have had a difficult couple of years but Numis believes market fears are overdone.
Analyst James Beard initiated coverage with a buy recommendation and target price of 980p on the shares, which were trading at 717.3p yesterday.
Babcocks shares endured a challenging 2016 and 2017, as concerns over slowing organic growth, the performance of Avincis post-acquisitions, and a succession of warnings and balance sheet issues at other outsourcers led to a significant de-rating of the shares, he said.
We believe that the markets concerns are overdone, albeit there are few short-term catalysts for the shares."
interesting article in todays Times saying that construction companies and outsourcing comps are no longer prepared to take fixed price contracts after the collapse of Carillion .£600bn infrastructure prog is struggling to attract bidders .I say no wonder the market has gone cold on this sector.....poor risk/reward profile for shareholders with JC waiting around in the background
I would assume that the government departments will have to go through all the usual tender processes which will take a considerable amount of time to conclude. Only if say Babcock were jointly appointed could they ask them to take on the additional work and even then they can be open to criticism.
However if Babcock can bid afresh on some of the contracts at a profitable price and win the contract then we will benefit. Interesting to see if anyone can pick up profitable contracts from Carillion by buying that part of the business. No one would want the lot as it is a sure way to lose money with the contracts they have.
"Babcock is currently unpopular and the question is whether this is merited because the stock is cheap, trading on a single-digit price-to-earnings ratio with a dividend that gives a 4.3% yield"
Doesn't this have to be considered in the context of the companies high debt?
The borrowings at Babcock have increased by over 100% in the last 5 years.
With an after tax profit of £258M on a turnover of £4.5Bn you are looking at a margin which is quite slim, so not much room for error.
The borrowings, as of March 2017 were £154M short term and £1,398M long term - so a total of £1,552 M, or some 6 times after tax profit.
This is high and I imagine with such high operational gearing there is always the risk of implosion if contracts are not as they seem -- look what happened to Capita and others in the service / outsource sector when it was discovered that the accounting/revenue practices were not as they seemed. Not saying this is the case at Babcock, but it might be.
Interesting that the growth and operations director announced his retirement today -- is he getting out?
"""21 December 2017
Babcock today announced that Bill Tame, Chief Executive Global Growth and Operations, will retire from the Group on 30 June 2018. ""
This is another or Woody's wonders -- it might all turn out to be OK in the end, but I wouldn't invest money in this now as it seems inordinately high risk to me.
"Feeling brave? Buy defence contractor Babcock as it is evicted from the FTSE 100:
This column appreciates that taking profits last week on Halma just as it entered the FTSE 100 and now warming to Babcock, the support services group, as it drops out of the blue-chip index may look barmy and there is no denying that it brings risk. Babcock is currently unpopular and the question is whether this is merited because the stock is cheap, trading on a single-digit price-to-earnings ratio with a dividend that gives a 4.3% yield and is 2.8 times covered by earnings.
The order book is fat, interest cover is good and cash conversion is healthy. Any firm that can increase its dividend every year for more than a decade must be doing something right, yet the markets (sceptical) view must be respected and there are three legitimate concerns. First, the support services sector has been a disaster zone, Second, the Government is delaying the release of its National Security Capability Review until next year to give the new Defence Secretary time to settle in. Finally, pressure is growing from politicians of all parties to prove that the outsourcing model really offers taxpayers value for money; Contracts are long-term, are currently being extended and do not rely on cost-plus mechanisms for Babcock to make a profit either.
A reaffirmation of earnings forecasts from Archie Bethel, the Chief Executive, alongside last months interim results was encouraging and 90% of revenues are already in place for this year, as are 60% of those for next. Relegation from the FTSE 100 could prompt selling from tracker funds and brave, patient investors may see this as an opportunity. Questor says Buy."
About 1% of the total in issue! One of the institutional holders shifting their holdings most likely. Someone is dumping a poor performer with bad prospects but someone else is picking up an oversold 'value' bargain! A holdings RNS likely to be out in a day or 2.
On the stock exchange website it appears to be listed as an 'off book' trade. The uncrossed volume was around 887000 at 16:35. Approx 6M shares went through after this.
Top holders (at end sept) from what I can see
Invesco 9.9% 50M
Capital Research & Mgmnt 5.79% (world) + 3.64% (global)
Im still holding
Some Director deals - are the amounts significant enough that we take comfort or just small amounts to kid the PIs? I'm in so I guess I have to take it as mildly positive but I'd like people paid a fortune to invest a little more.
....some know all ,mark sedwill ,is telling our government to move spending to cyber security and less on our armed services (read for yourself in the telegraph ) .clearly defence is an easy area to take the brunt of any cutbacks going and this will not help our business .bears will run out of steam soon with this story .hanging on for now
our current market cap means demotion to the ftse 250 ......replaced by Just Eat .....who'd have thought what is basically a glorified App operation would be more valuable than BAB .what strange times we live in
"Babcock set to perform long term, says Shore Capital
Lower debt and more normal working capital means engineering support services company Babcock (BAB) is on track to perform well, says Shore Capital.
Analyst Robin Speakman reiterated his buy recommendation on the stock despite first-half results sending the shares 6.8% lower at 703.5p yesterday.
Babcock continues to perform well, in our opinion, on an underlying level, he said.
This reflects its strong market position in essential, non-discretionary spend, services. We feel confident that the business trajectory is set to see net debt levels fall substantially over the next couple of years as working capital and capital expenditure tends to normalise. Contract performance appears high to us. "
It does not look like I've got long to wait to buy again!! It shows how poor my reading of a set of accounts is.....
This seems to be the gist from an article on the Daily Mail:
Babcock warned that British defence spending reviews could slow revenue growth as it derives three quarters of its revenue from the UK and its shares have come under sustained pressure from expectations that Brexit will delay customer decision-making.
The stock is down 20 percent in the past 6 months, roughly in line with other British outsourcers, which broker Peel Hunt said reflects investor concern over pressures on the funding of UK defence programmes, the issues at other companies in the outsourcing sub-sector and increased political uncertainty.
Babcock cautioned that UK government spending reviews could "delay the start of large new vehicle programmes" and weigh on organic revenue growth in its land division, which provides support for military vehicles, in the year to March 2019.
"The tone of the questions (by the investment community) is negative and the perception is that this is a company that is going to warn on profits. To my mind, it isn't," said Shore Capital analyst Robin Speakman.
Unlike administrative service providers Capita, Serco and Carillion, Babcock's business model is not based on discretionary spending, he added.
BAB fairly high gearing of 58% and modest ROCE of only 9.0% worry me. They are also under-performing their sector index, which in turn is out of favour thanks to CLLN. The yield is above average but that is largely because of fall in SP. I have held BAB since Jan 2013 and am showing an overall return of about -12%. I am glad I sold sold 29% of my BAB shares at the end of Sept for 836.6. They are beginning to look oversold now, perhaps a buy below 700 as Hangover2 suggests.
Obviously - I should have waited!! Sitting tight now but will buy more if it goes sub-700p over the coming days......lets see....I accept there is a lot of political uncertainty and also company's like this go from trading well to being locked into poor contracts from which they find it hard to recover. My gut feel this is more about a risk re-rating on this type of share than anything in these accounts..
The market was expecting better figures obviously but increase to revenues, dividend and profits looks good to me. 92% revenues for next year in, what more can they do. I suspect that it has a good deal to do with sector sentiment. Good buy for the long term and I will be topping up at these prices.
I think fears of Support Service comparisons are overdone in BAB's case and at this price I've bought. A rising dividend and chance of a drift up in share price are both things I like and they've transitioned to the new accounting rules too.
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