Babcock International Group PLC (LON:BAB) has said it will take a revenue hit of around £100mln from financial year 2020/21 after a joint venture agreed to end the Magnox nuclear power station decommissioning contract.
The FTSE 100-listed contractor said Cavendish Fluor Partnership (CFP) - in which the group has a 65% stake - has come to a mutual agreement with the UK's Nuclear Decommissioning Authority (NDA) to bring to an end the Magnox decommissioning contract at the end of August 2019, having operated the contract for a full five years.
In a statement, Babcock said: “Following the detailed contract Consolidation phase, it has become apparent that the work that needs to be done at the 12 Magnox sites is now materially different in volume from that specified in the NDA's tender, and this puts the contract at risk of a legal challenge”.
Last year a High Court judge ruled against the NDA in respect of its award of the Magnox contract.
NDA CEO David Peattie said: "Terminating is no reflection on CFP as performance on the sites under its ownership has been strong.”
Babcock chief executive Archie Bethel said: “We have developed a good working relationship with the NDA and we look forward to working with them, not only to bring this contract to an orderly end in two and a half years' time but also on future projects, including the completion of the decommissioning of the Magnox power stations."
Order book knock …
Babcock said the change to the contract will result in the removal of around £800mln from its £20bln order book, “creating an annual step down in revenue of around £100m (less than 2% of the Group's turnover) from financial year 2020/21 which we would expect to replace in the normal course of business over that timeframe.”
It added: “Around £1bn will be removed from the c £11bn bidding pipeline; however a number of new identified opportunities coming forward from our tracking pipeline is likely to result in the bidding pipeline being broadly unchanged.”
The group said “the contract change is not expected to have any negative financial impacts over the next three years and we do not expect this announcement to change the financial guidance we expect to give at the Group's full year results in May”.
In early trading, Babcock shares topped the FTSE 100 fallers list, down over 4%, or 40.5p at 876.0p.
In a note to clients on Babcock, analysts at Liberum Capital said: “Mathematically, it will reduce the pipeline, which is a very discretionary number anyway, by 9% from £11bn to £10bn, although management indicate that the pipeline is actually likely to be unchanged at the FY given other opportunities.”
The analysts added: “This is marginally negative, however a CY 2017 P/E of 10.9x is too cheap to ignore.”
They repeated a ‘buy’ rating and 960p target price on Babcock shares.
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