After Babcock International (LSE:BAB) revealed a surprise £140 million charge on its Type 31 frigate programme, analysts said it overshadowed another year of strong operational progress, but was not enough to derail the defence contractor’s improving cash generation and balance sheet strength.
Jefferies said the scale of the latest charge was larger than many investors had expected after concerns around the Royal Navy programme had eased over the past two years.
The latest provision brings total charges on the contract to around £330 million following earlier hits taken in the 2023 and 2024 financial years.
Babcock said the new costs stemmed from complex late-stage rework on the first two ships caused by earlier design changes and out-of-sequence construction activity.
Jefferies said the third and fourth ships were expected to see a “comparatively reduced” impact because they remain at earlier build stages.
Despite the setback, analysts highlighted that underlying trading remained ahead of expectations.
Jefferies noted that revenue growth of 10% and adjusted operating profit of £433 million, excluding the Type 31 charge, both beat consensus forecasts, while free cash flow came in 22% ahead of expectations.
Analysts at Peel Hunt said the underlying performance demonstrated “strong momentum” across the business, particularly in Nuclear and Aviation, with margins improving to 8.2%, ahead of Babcock’s 8% target for the year.
Both brokers also pointed to the significance of the new £200 million share buyback announced alongside the update, arguing it underlined management confidence in the group’s financial position despite the contract setback.
Jefferies said the decision to launch another buyback showed Babcock was now in a much stronger position to absorb legacy project costs than in previous years.
Peel Hunt added that rising global defence spending, renewed investment in UK nuclear infrastructure and Babcock’s low leverage gave the company scope for “mid- to high-teens” earnings growth over the medium term.
The brokers also noted that guidance for the 2027 financial year was unchanged, with around 70% of expected revenues already covered by contracts at the start of April, helping reassure investors over future growth visibility.
However, the Type 31 issues are likely to remain a focus after Babcock delayed publication of its full-year results until late June because the audit was pushed back to take account of the revised estimates on the programme.