Shares in defence and nuclear contractor Babcock International (LON:BAB) sank 7% despite the firm reiterating its medium-term outlook and announcing a share buyback. Today’s drop takes the year-to-date decline to over 20% compared with a 9% gain for the UK Aerospace & Defence index.
Good underlying growth
Babcock presented its outlook for FY27 and the medium term with its results for FY26. For the 12 months to March, the company posted 8% underlying growth in revenue to £5.2 billion.
That revenue figure included a £95.5 million reversal as part of a charge for the Royal Navy Type 31 frigate contract. Underlying operating profit rose 19% to £433 million, but after £140 million of Type 31 charges was reduced to £293 million.
Underlying EPS grew 20% to 60.5p, in line with analysts’ forecast, but after the charge were 39.6p. However, underlying free cash flow rose 71% to £262 million driven by strong operating cash conversion.
For FY27, the firm repeated its forecast for ‘another good year of progress’, with around 70% of revenue already contracted. The company also raised its full-year dividend by 15% and announced a second £200 million share buyback.
Type 31 travails
Babcock announced in May it would take a £140 million charge for higher-than-expected costs on the Type 31 frigate contract. The charge is to cover rework on ship one, following design changes, and an updated estimate to complete all five ships.
The Type 31 contract represents less than 4% of group revenue and is spread over many years. However, the additional costs are being taken in one go rather than being spread over the lifetime of the contract.
Babcock has high hopes of building frigates for other countries as part of the Type 31 programme. Countries such as Poland and Indonesia are already buiding their own ships using Babcock’s platform and technology.
At first glance, today’s poor share price reaction might be thought to stem from the charge for the Type 31 programme. However, that was telegraphed to the market in last month’s trading update.
As flagged in the intro, Babcock shares are down almost 20% since the start of the year. To put that in context, however, the shares quintupled from 300p to £15 between mid-2023 and mid-January 2026.
Ultimately they were trading on 25 times cyclically-adjusted earnings, which was unsustainable. To justify that rating, the company would have to be growing EPS at double digits. In contrast, by our calculation all it has managed historically is around 3%, with higher-than-expected volatility.
Given the shares still aren’t cheap at 18 times, we would question the worth of the company buying them back here. Maybe the firm and investors would be better off if it kept hold of the cash in order to win new business.
read the press release here: https://www.babcockinternational.com/investors/
