Analysts welcomed Babcock International PLC (LSE:BAB) latest results and declaration of "a new era" for the defence sector, with some saying the upgraded guidance could potentially even be conservative.
The headline revenue and profit numbers had already been flagged by a pre-close update, but the full-year results impressed with underlying profit growth, divisional performances from Nuclear, Marine and Land, plus the growing shareholder returns amid a swelling order book.
“The shift in foreign policy under the Trump administration is pushing European countries to up their military spending, although much of this will be yet to come through, so the fact Babcock is already seeing improved trading is encouraging," said Russ Mould, head of investment at AJ Bell.
Jefferies’ Chloe Lemarie noted that the FTSE 100 group has raised its medium-term profit margin target to at least 9%, up from 8%, with FY26 guidance already set at 8% – a year ahead of plan and 5-6% above consensus expectations.
The launch of a £200 million share buyback programme, representing around 4% of Babcock’s market capitalisation, was also praised by Lemarie, who pointed out that it comes with the group almost fully de-levered and after completing a pension de-risking.
Mould said that while some eyebrows may be raised at the decision to launch the company’s debut share buyback when its share price is at its highest level in more than a decade and not a million miles off its all-time high from 2014, "in fairness, this is merely following the recent trend for UK companies to return an increasing proportion of the capital they dole out to shareholders this way".
Among divisions, Nuclear "stands out", said Lemarie, with sales growing 19%, significantly ahead of a 3% consensus forecast, driven by broad portfolio growth. Cavendish Nuclear delivered particularly strong results, with sales up 28% and operating profit up 47%.
But the outlook for Nuclear was part of what analyst Nick Cunningham of Agency Partners said was a potentially conservative set of guidance.
The company aims for 5% organic growth and 8% margins, compared with 11% growth and 7.5% margins achieved in FY25.
He said an ambitious "but, in our view, achievable" goal for the medium-term would be 10% for both, especially given that he sees increasing tailwinds, but he accepted that "there might be one or more staging points towards this".
A number of events and announcements have occurred that has the potential materially to benefit medium-term revenue growth, profitability and/or cashflows, he said.
"In particular, we see the target to nearly double the revenues of the Cavendish civil nuclear business to circa £600 million by 2030, as discussed at Babcock’s 20 May civil nuclear 'teach-in”' as looking particularly conservative," Cunningham said.
Susannah Streeter at Hargreaves Lansdown said Babcock’s shares had already benefited from increasing defence budgets amid rising geopolitical tensions but also pointed to NATO members’ commitment at this week's Hague summit to spend 5% of GDP on defence and related infrastructure.
Streeter added: "As military tensions ratchet up across the world, as part of a geopolitical risk megacycle, the situation is set to keep prospects for defence stocks solid.
"Much of the spending expectations are already baked in to valuations, but these long-term commitments will have significant repercussions."