Babcock International PLC (LSE:BAB), a FTSE 250-listed defence company, is trading at a discount relative to its peer group in the defence sector, according to analysts.
The discount has prompted analysts at stockbroker Peel Hunt to upgrade their rating of the company and the expectations for where its share price would be fairly priced.
Yesterday, Babcock reinstated its dividend for the first time in four years after boosting underlying operating profit by more than a fifth.
“We are reinstating our dividend following a four-year hiatus, reflecting our confidence in the future, and our expectations for the full year remain unchanged,” said Babcock’s chief executive officer David Lockwood.
The defence services group grew underlying operating profit to £154.4 million for the first half, up from £121.7 million a year ago, according to its statutory results for the half year.
It reported nearly £2.18 billion of revenue for the six months to 30 September, up from £2.14 billion last year, while reiterating expectations for the full fiscal year.
Peel Hunt analysts have upgraded their rating of the company from ‘hold’ to a ‘buy’, they said in a research note on Tuesday.
Analysts at the brokerage have increased their target price for the defence company, which provides critical support and engineering services to defence and civil customers, from 382p to 461p per share.
They said Babcock’s shares are trading at a 34% discount compared to its peer group.
Babcock’s shares are trading at about 11 times the fiscal 2024 earnings per share estimates, and six times underlying earnings (EBITDA) estimates for the year.
“This is undemanding, in our opinion, given the forecast EPS CAGR over FY23-FY27E of 11% and the potential upside with share buybacks,” Peel Hunt analyst Christopher Bamberry said in the emailed research note.