Citi has raised its price target for Babcock International PLC (LSE:BAB) to £7.30 from £6.60 and maintained its ‘buy’ rating, citing continued strong performance and an ongoing operational turnaround.
The investment bank sees £4.9 billion in revenue for the 2025 financial year, in line with Babcock’s own forecasts, and expects an operating margin of around 7%, delivering £350 million in earnings before interest and tax (EBIT).
Delivering on growth and margins
Citi highlights that if Babcock meets its 2025 targets, it will have delivered three consecutive years of high single-digit revenue growth, while margins are already approaching the company’s 8% mid-term target.
Babcock, a key defence contractor for the UK government, has been focused on improving efficiency and driving higher profitability under its current leadership.
Citi has made small upward adjustments to its medium-term profit and cash flow forecasts, increasing them by 2-4%.
The firm now expects £322 million in underlying operating cash flow, which represents a 90% cash conversion rate relative to its underlying operating profit forecast. This suggests Babcock is not just growing but also efficiently turning its profits into cash, which is key for long-term financial stability.
A Turnaround story playing out
Citi has long seen Babcock as a value opportunity, believing that strong management and operational improvements could help the company outperform expectations. The latest update reinforces this view, with Babcock continuing to execute its turnaround strategy effectively.
The company plays a crucial role in defence and engineering, providing maintenance and support for naval ships, submarines, and military aircraft. With global defence spending on the rise, Babcock is well-positioned to benefit from increased demand for high-tech military support services.
Outlook for 2025 and beyond
Looking ahead, Citi sees further upside potential if Babcock continues to deliver on its strategy. The company's improving margins, strong cash generation, and consistent revenue growth support the case for higher valuation.
While investor confidence has been rebuilding, Citi's price target upgrade to £7.30 suggests there is still room for further gains as Babcock proves it can meet and potentially exceed its financial goals.