Babcock International Group PLC shares gained 0.9% after Jefferies assumed coverage with a buy rating and increased price target of 460p (up from 450p).
The broker believes that Babcock is at a turning point of its equity story, with the free cash-flow recovery, driven by both EBITA margin recovery and a drop-off in one-off cash headwinds, making its value appeal clearer.
It feels a financial year 2024 free cash flow guide would represent a “key catalyst.”
“Babcock is a recovery story, as execution issues have pressured its margin, and unwinding of window-dressing practices pushed FCF into negative territory,” it said.
Babcock is now a value name, it said, trading at a steep discount to its UK defense peers BAE Systems and QinetiQ.
“We anticipate a re-rating, once the group starts to deliver on its FCF recovery (lower WC, pensions headwinds), which should allay concerns on its balance sheet and reopen the window for cash returns to shareholders,” the broker continued.
Jefferies accepts Type 31 & inflation represents the main risk to its positive view on the name.The broker said it was mindful of the risks on Type 31 and inflation and include £250mln of provisions compared to the £50-100mln guided by the firm.