It is the dog that didnt bark. Babcock is the large government contractor that has been causing the analyst community the three-pipe problem of why it hasnt followed other outsourcing giants Capita, Serco, Mitie, Interserve and, of course, Carillion into financial crisis. The reason this dog didnt bark, as Sherlock Holmes would have deduced, is that it didnt have to.
Many analysts have been wondering for years when Babcocks moment of crisis would come.
Babcock has long argued that to link it with lower-margin outsourcers who clean the floors at public sector offices or do back office government number-crunching is a misreading of the facts.
Instead, Babcock provides engineering services that keep the air force flying and the navys boats floating. Its margins are 10 per cent-plus compared with the sub-5 per cent, or indeed minus in places, of others in the support services sector.
It stays close to its main client, the Ministry of Defence, to ensure that it doesnt have major contractual blowouts. Its only exposure to the cost-cutting Cabinet Office is work for the Nuclear Decommissioning Authority, which is also high-end engineering and pays high margins.
It could be smart for Babcock to get itself reclassified in engineering. So far, this advice has been ignored.
Yesterday, Babcock confounded the doom-mongers again. It posted an 8 per cent rise in annual pre-tax profits to £512 million in the year to March 31, while revenues hit £4.6 billion. Both were records, albeit not wholly unexpected. The City liked the cash conversion an issue that has brought down so many in support services which enabled it to cut debt 5 per cent to £1.1 billion. Analysts also liked the £31 billion order book and bid pipeline.
Babcock runs boatyards such as Devonport in Plymouth and Clyde in Scotland for the MoD, and at Rosyth it has helped to build Britains two new aircraft carriers. It also looks after and helps train the British Army and runs airbases, maintains aircraft and trains pilots for the RAF.
Its pipeline of work includes the design, build and maintenance of the new Type 31e frigate; training RAF and Royal Navy pilots in fighting; £500 million work at the new Hinkley Point C nuclear power station; and delayed electrification work with Network Rail.
Crucially, the pipeline also includes bidding for contracts to train Canadian and Spanish air force pilots. This is the sort of work that will wean Babcock off its dependence on the UK MoD and hit its target of 30 per cent of income from overseas. The Australian military and South African mining industry are already fertile grounds for Babcock and it is training French air force pilots.
Stephen Rawlinson, an independent sector analyst, admits to being puzzled by Babcock. He wonders about the sustainability of those 10 per cent margins, worries about debt still at 1.6 times ebitda profits and says the good cash conversion gets eaten pretty quickly by having to service debt, pay into the pension funds, pay HMRC, and keep up capital expenditure and invest in technology.
Though the shares lifted 19½p to 784p yesterday, Mr Rawlinson believes Babcocks stock profile is more typical of a flawed building contractor with a chequered history than an engineering services company.
From £10.91 18 months ago to 631p during the fallout from the Carillion fiasco this year, Babcock shares have now put on about 25 per cent in three months. Babcock has not been an elementary case for the City to crack, but with a strong dividend record, the signs are it may be a dog worth going for a walk with.
WHY Babcock has been unfairly tarred by other contractors misdemeanours. The shares have fallen too far
Agreed good results. SP was up nearly 6% this morning but now only up 2.8%. I guess some investors taking advantage of rise to sell this share, that has been under performing since Feb 2014. Thankfully it has started to pick up since Feb this year. It needs to go up another 20% before I show any CG on them. A lot of patience needed with BAB!
"Foll says. She points out that Babcock tends to only bid for contracts where it is the sole bidder, like the decommissioning of nuclear submarines.
They are the only company in the UK capable of doing that, she explains. Therefore the margins theyre making are more like 10%, whereas the general contractors tend to be aiming for between 1% and 3%."
If only this were true, once the creative accounting becomes clear. Babcock is probably very little different than the others in it's susceptibility to complex accounting trickery.
The trouble is, you only find this out on the morning that the shares have tanked.
Being the sole bidder, doesn't guarantee a successful outcome - it could also be that others find it unattractive to do so.
The debts, operation costs etc are such at Babcock, that it's possibly uninvestable, or at the very least a lower quality investment than many other choices.
Liberum believes Babcock (BAB) is too cheap to ignore despite the engineering group trimming its revenue forecasts yesterday.
The company said yesterday that despite the dent to revenues it would meet its earnings forecasts after cost savings helped it to increase margins.
Analyst Jo Brent maintained his buy rating and £11 target price on the shares, which fell 4.2% to 625.4p yesterday.
A 2018 free cashflow yield of 7% is attractive for a company which is thought to be a poor cash generator, he said.
He added the company had reassured over its pipeline of work. The pipeline has increased from £12 billion to £12.5 billion, and management says visibility is good for 2019.
The shares were down 4% at 626.2p yesterday."
"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. "
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